<PAGE>
AHA INVESTMENT FUNDS, INC.
ANNUAL REPORT TO SHAREHOLDERS
AS OF JUNE 30, 1996
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
PAGE
Portfolio of Investments 1
Full Maturity Fixed Income Portfolio
Limited Maturity Fixed Income Portfolio
Diversified Equity Portfolio
Balanced Portfolio
Financial Statements 42
Notes to Financial Statements 46
Report of Independent Public Accountants 57
Manager Discussions and Performance Graphs 58
Full Maturity Fixed Income Portfolio
Limited Maturity Fixed Income Portfolio
Diversified Equity Portfolio
Balanced Portfolio
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
SHARES OR
PRINCIPAL
---------
LONG-TERM OBLIGATIONS 98.3% MARKET VALUE
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 59.3% ------------
United States Treasury Bonds Stripped
$ 700,000 0.000% 02/15/20 effective yield 6.25% $ 132,546
United States Treasury Bonds
305,000 8.875% 02/15/19 367,906
960,000 7.125% 02/15/23 969,899
620,000 7.625% 02/15/25 668,631
200,000 6.000% 02/15/26 177,437
United States Treasury Notes
1,995,000 5.250% 12/31/97 1,974,425
830,000 5.875% 04/30/98 827,146
325,000 5.250% 07/31/98 319,516
3,036,000 5.125% 11/30/98 2,963,895
3,130,000 6.375% 05/15/99 3,138,801
450,000 7.750% 12/31/99 469,125
380,000 6.875% 03/31/00 385,818
729,000 8.500% 11/15/00 785,498
1,765,000 6.500% 05/31/01 1,765,550
156,000 6.250% 02/15/03 153,221
695,000 5.750% 08/15/03 661,553
715,000 6.875% 05/15/06 723,044
Federal Home Loan Mortgage Corporation
111,212 10.500% 01/01/10 121,367
270,674 5.500% 03/01/11 250,877
469,801 9.000% 04/15/19 496,518
20,442 9.000% 09/01/19 Series 53-8227 21,314
479,557 7.000% 05/01/24 462,354
634,181 7.000% 02/01/26 611,407
494,525 6.500% 03/01/26 463,771
4,400,000 7.000% 07/01/26 4,241,841
The accompanying notes to the financial statements are an integral part of
this schedule.
1
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (CONTINUED)
Federal National Mortgage Association
(mortgage-backed securities)
$ 495,415 7.500% 07/01/01 $ 502,351
223,493 6.500% 01/01/11 216,734
269,365 6.000% 03/01/11 255,134
257,665 7.000% 03/01/11 254,861
993,991 7.500% 04/01/11 999,273
249,783 8.500% 01/01/25 256,585
991,402 7.500% 09/01/25 979,912
366,299 6.500% 01/01/26 343,205
249,167 8.000% 01/01/26 251,545
747,484 7.000% 02/01/26 719,620
490,333 8.000% 04/01/26 494,773
249,671 7.500% 05/01/26 246,782
Government National Mortgage Association
(mortgage-backed securities)
189,983 6.500% 11/15/23 178,846
239,313 6.500% 01/15/24 223,447
472,374 6.500% 01/20/25 473,669
763,988 7.000% 06/20/25 767,907
498,531 7.500% 03/15/26 491,828
767,600 8.000% 06/15/26 775,271
-------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 31,585,203
ASSET BACKED OBLIGATIONS 10.4%
Advanta Credit Card Master Trust
675,000 6.050% 08/01/03 Series 1995-F 661,183
Asset Security Corporation
497,285 6.920% 02/14/29 Series 1996-D 482,366
The accompanying notes to the financial statements are an integral part of
this schedule.
2
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
ASSET BACKED OBLIGATIONS (CONTINUED)
Chevy Chase Home Loan
$ 500,000 7.150% 05/15/15 Series 1996-1 $ 500,625
Ford Motor Credit Company
78,758 4.300% 07/15/98 Series 1993-B 78,386
500,000 6.500% 08/15/00 Series 1995-A 497,190
NationsBank Auto Grantor
411,105 5.850% 06/15/02 Series 1995-A 410,517
500,000 6.450% 08/15/00 Series 1995-A 497,940
Nomura Asset Securities Corporation
200,000 7.120% 04/13/36 Series 1996-M 195,000
Resolution Trust Corporation
643,423 6.529% 04/25/22 Series 1992-9 628,548
651,818 7.500% 08/25/23 653,858
500,020 6.995% 06/25/24 486,895
Rural Housing Trust
178,172 3.330% 04/01/26 Series 1987-1 164,364
Standard Credit Card Trust Series 1993-2
65,000 8.250% 11/07/01 68,836
250,000 5.950% 10/07/04 235,510
-------
TOTAL ASSET BACKED OBLIGATIONS 5,561,218
CORPORATE OBLIGATIONS 28.6%
AEROSPACE 1.9%
Lockheed Martin
320,000 6.625% 06/15/98 321,466
200,000 7.450% 06/15/04 202,897
500,000 7.750% 05/01/26 497,038
-------
1,021,401
The accompanying notes to the financial statements are an integral part of
this schedule.
3
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
BANKS 3.9%
Banque Paribas
$ 400,000 6.875% 03/01/09 $ 370,813
Citicorp
155,000 8.000% 02/01/03 162,228
First National Bank of Boston
600,000 8.375% 12/15/02 639,172
Fleet Norstar Bank
180,000 7.650% 03/01/97 181,811
National Bank of Detroit
220,000 8.250% 11/01/24 241,463
Wachovia Bank
500,000 6.800% 06/01/05 487,558
-------
2,083,045
COMMUNICATION 1.3%
Time Warner Entertainment
190,000 9.150% 02/01/23 196,268
490,000 8.375% 07/15/33 477,720
-------
673,988
ELECTRONICS 1.2%
Hydro-Quebec
500,000 8.875% 03/01/26 554,150
70,000 9.500% 04/30/27 84,375
------
638,525
The accompanying notes to the financial statements are an integral part of
this schedule.
4
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
FINANCIAL 7.6%
Auburn Hills Trust
$ 280,000 12.000% 05/01/20 $ 405,071
Bear Stearns Company
500,000 6.750% 05/01/01 494,998
BHP Financial USA
275,000 7.875% 12/01/02 284,656
British Gas Financial
1,900,000 0.000% 11/04/21 effective yield 6.850% 255,313
Chrysler Financial Corporation
750,000 7.570% 03/17/97 758,175
Equitable Companies
400,000 9.000% 12/15/04 440,973
General Motors Acceptance Corporation
220,000 8.625% 01/18/01 234,345
International Lease Financial Company
600,000 6.250% 10/15/00 586,171
KFW International
215,000 8.200% 06/01/06 228,474
Salomon Incorporated
400,000 6.750% 02/15/03 383,626
-------
4,071,802
The accompanying notes to the financial statements are an integral part of
this schedule.
5
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
HEALTH CARE 0.7%
Schering Plough Corporation
$ 400,000 0.000% 12/02/96 effective yield 6.75% $ 390,845
INDUSTRIAL 0.5%
Hanson America
325,000 2.390% 03/01/01 278,688
METAL & MINERAL 1.1%
Noranda Incorporated
600,000 7.000% 07/15/05 578,741
PAPER 0.2%
Westvaco Corporation
120,000 8.300% 08/01/22 121,262
RETAIL STORES 0.3%
May Department Stores
165,000 8.375% 08/01/24 167,992
TELECOMMUNICATION 1.3%
TCI Communications Incorporated
520,000 8.750% 08/01/15 510,040
180,000 7.875% 02/15/26 158,698
-------
668,738
The accompanying notes to the financial statements are an integral part of
this schedule.
6
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
UTILITIES 2.6%
Idaho Power Company
$ 125,000 8.000% 03/15/04 $ 130,893
KN Energy Incorporated
200,000 9.625% 08/01/21 221,117
Puget Sound Power & Light
250,000 7.700% 12/10/04 253,710
System Energy
394,130 7.430% 01/15/11 364,296
Long Island Lighting Financial
400,000 9.625% 07/01/24 400,608
-------
1,370,624
MISCELLANEOUS 3.3%
Alco Standard Corporation
300,000 6.750% 12/01/25 260,603
Lubrizol Corporation
400,000 7.250% 06/15/25 381,189
News American Holdings
400,000 8.875% 04/26/23 424,440
500,000 7.700% 10/30/25 459,499
New Zealand Government
225,000 8.750% 12/15/06 254,006
-------
1,779,737
The accompanying notes to the financial statements are an integral part of
this schedule.
7
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
EURO BONDS 2.7%
International Bank Recon & Development
$ 180,000 9.750% 01/23/16 $ 217,575
Norddeutsche
300,000 6.875% 03/10/03 297,282
Manitoba Province CDA
325,000 6.125% 01/19/04 308,350
Quebec Province
300,000 7.500% 07/15/23 288,042
30,000 7.125% 02/09/24 27,536
Westdeutsche Bank
240,000 6.750% 06/15/05 234,649
-------
1,373,434
TOTAL CORPORATE OBLIGATIONS 15,218,822
----------
TOTAL LONG-TERM OBLIGATIONS (COST $52,697,144) 52,365,243
----------
SHORT-TERM OBLIGATIONS 9.5%
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 4.7%
U.S. Treasury Bills
(A) 355,000 4.970% 07/05/96 354,809
(A) 100,000 4.945% 07/18/96 99,766
Federal National Mortgage Association
2,040,000 5.240% 07/09/96 2,037,625
---------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 2,492,200
The accompanying notes to the financial statements are an integral part of
this schedule.
8
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES, PRINCIPAL OR
NUMBER OF CONTRACTS MARKET VALUE
------------------- ------------
SHORT-TERM OBLIGATIONS (CONTINUED)
DEMAND NOTES 4.8%
American Family Demand Note
$ 90,226 5.145% 12/31/31 $ 90,226
General Mills Demand Note
193,706 5.140% 12/31/31 193,706
Johnson Controls Demand Note
1,033,495 5.165% 12/31/31 1,033,495
Southwestern Bell Demand Note
200,000 5.124% 12/31/31 200,000
Pitney Bowes Demand Note
175,878 5.144% 12/31/31 175,878
Warner Lambert Demand Note
852,230 5.115% 12/31/31 852,230
Wisconsin Electric Demand Note
28,042 5.185% 12/31/31 28,042
------
TOTAL DEMAND NOTES 2,573,577
---------
TOTAL SHORT-TERM OBLIGATIONS
(AMORTIZED COST $5,065,777) 5,065,777
---------
OPTIONS- PURCHASED 0.0%
Call Options Eurodollar Futures
38 Expiring September 1996 2,850
Call Options Eurodollar Futures
16 Expiring December 1996 14,800
Put Options Eurodollar Futures
4 Expiring September 1996 500
---
TOTAL OPTIONS PURCHASED
(COST $17,985) 18,150
------
TOTAL INVESTMENTS
(COST BASIS $57,780,906 107.8% 57,449,170
The accompanying notes to the financial statements are an integral part of
this schedule.
9
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES, PRINCIPAL OR
NUMBER OF CONTRACTS MARKET VALUE
------------------- ------------
OPTIONS- WRITTEN 0.0%
12 Call Options 5 Year Treasury Note $ (15,750)
Expiring September 1996
12 Call Options 5 Year Treasury Bond (9,188)
Expiring September 1996
4 Put Options Eurodollar Futures (500)
-----
Expiring September 1996
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $19,478) (25,438)
--------
TOTAL INVESTMENTS NET OF
OUTSTANDING WRITTEN OPTION 107.8% 57,423,732
CASH AND OTHER ASSETS, LESS
LIABILITIES -7.8% (4,131,668)
----------
TOTAL NET ASSETS 100.0% $ 53,292,064
----------
----------
The accompanying notes to the financial statements are an integral part of
this schedule.
10
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
(A) $120,000 OF U.S. TREASURY BILLS PLEDGED AS MARGIN FOR FUTURES CONTRACTS.
THE PORTFOLIO HAD THE FOLLOWING OPEN FUTURES CONTRACTS AT JUNE 30, 1996:
OPEN FUTURES CONTRACTS:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF PRINCIPAL GAINS (LOSSES)
TYPE CONTRACTS AMOUNT POSITION EXPIRATION JUNE 30, 1996
---- --------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
5 Year Treasury Note 78 78,000 Long September 1996 $100,102
10 Year U.S. Treasury Notes 1 1,000 Long September 1996 2,118
30 Year U.S. Treasury Notes 20 20,000 Short September 1996 (57,354)
------
$44,866.00
----------
----------
</TABLE>
The accompanying notes to the financial statements are an integral part of this
schedule.
11
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
SHARES OR
PRINCIPAL
90.7%
46.9%
United States Treasury Notes
$ 1,742,000 7.375% 11/15/97 $ 1,773,030
7,105,000 5.625% 01/31/98 7,060,594
20,030,000 7.250% 02/15/98 20,393,044
4,075,000 5.125% 04/30/98 4,007,505
3,800,000 5.875% 04/30/98 3,786,935
1,800,000 6.125% 05/15/98 1,801,125
1,850,000 5.375% 05/31/98 1,825,719
2,708,000 5.125% 06/30/98 2,659,762
4,240,000 5.875% 08/15/98 4,216,150
1,615,000 5.125% 11/30/98 1,576,644
3,275,000 5.125% 12/31/98 3,193,125
745,000 5.000% 02/15/99 723,116
3,710,000 5.875% 03/31/99 3,674,057
1,995,000 6.500% 04/30/99 2,006,844
6,820,000 6.375% 05/15/99 6,839,176
5,070,000 6.875% 08/31/99 5,144,462
1,555,000 7.750% 01/31/00 1,621,572
7,755,000 6.750% 04/30/00 7,839,815
4,540,000 6.250% 05/31/00 4,511,625
3,000,000 6.875% 05/15/06 3,033,750
Federal Home Loan Bank Corporation
900,000 5.945% 09/05/97 899,661
Federal Home Loan Mortgage Corporation
218,885 6.225% 05/15/97 Variable Rate CMO 219,411
Federal National Mortgage Association
(mortgage-backed securities)
880,000 5.280% 03/01/99 857,289
2,090,000 7.500% 08/01/11 2,101,104
The accompanying notes to the financial statements are an integral part of this
schedule.
12
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
LONG-TERM OBLIGATIONS (CONTINUED)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (CONTINUED)
Government National Mortgage Association
(mortgage-backed securities)
$ 182,954 10.000% 08/15/16 $ 199,519
212,957 10.000% 09/15/16 232,238
9,681 9.500% 11/15/16 10,455
64,647 9.500% 05/15/18 69,713
1,198 9.500% 06/15/18 1,292
42,252 9.500% 07/15/18 45,563
15,124 10.000% 10/15/18 16,485
204,737 10.000% 11/15/18 223,164
77,814 10.000% 03/15/19 84,799
17,570 10.000% 04/15/19 19,147
11,769 9.500% 09/15/19 12,680
10,841 9.500% 04/15/20 11,672
349,378 9.500% 05/15/20 376,148
302,869 9.500% 06/15/20 326,075
95,266 9.500% 08/15/20 102,565
28,432 10.000% 08/15/20 30,979
6,425 9.500% 09/15/20 6,918
24,115 9.500% 10/15/20 25,963
545,829 9.500% 11/15/20 587,650
164,323 9.500% 03/15/21 176,813
10,566 9.500% 04/15/21 11,369
102,959 9.500% 06/15/21 110,778
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 94,447,500
ASSET BACKED OBLIGATIONS 10.6%
Advanta Credit Card Master Trust
2,000,000 6.050% 08/01/03 Series 1995-F 1,959,060
Banc One Auto Trust
2,310,000 6.550% 02/15/03 Series 1996 2,315,775
Case Equipment
2,219,042 7.300% 03/15/02 2,252,373
The accompanying notes to the financial statements are an integral part of this
schedule.
13
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
LONG-TERM OBLIGATIONS (CONTINUED)
ASSET BACKED OBLIGATIONS (CONTINUED)
Chase Manhattan Grantor
$ 202,108 4.200% 04/15/99 Series 1993-A $ 201,672
2,106,595 6.000% 09/17/01 Series 1995-A 2,107,922
860,000 6.730% 02/15/02 Series 1996(4) 867,981
Daimler Benz Auto Receivable
502,767 3.900% 10/15/98 Series 1993-A 501,028
533,079 5.950% 12/15/00 Series 1994-A 533,128
Discover Credit Card Trust Series 1993-A
1,150,000 6.250% 08/16/00 1,150,782
Ford Credit Grantor Trust
2,120,000 5.500% 02/15/03 Series 1996(1) 2,004,905
General Motors Acceptance Corporation Grantor Trust
1,000,000 7.625% 02/27/98 1,020,079
1,000,000 7.500% 03/16/98 1,018,323
430,000 6.450% 04/15/99 428,241
Green Tree Financial Corporation
1,293,229 5.600% 04/15/19 1,290,566
Honda Auto Receivable
40,527 4.900% 06/15/98 Series 1992-A 40,523
Premier Auto Trust
2,569,257 6.350% 05/02/00 Series 1994(2) 2,583,208
USAA Auto Loan Grantor Series 1994(1)
673,051 5.000% 11/15/99 670,501
Western Financial Grantor Trust
394,502 6.050% 11/01/00 Series 1995(3A) 394,463
-----------
TOTAL ASSET BACKED OBLIGATIONS 21,340,530
The accompanying notes to the financial statements are an integral part of this
schedule.
14
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS 33.2%
BANKS 7.5%
BankAmerica Corporation
$ 2,000,000 5.750% 03/18/98 $ 1,982,512
FCC National Bank
1,530,000 6.375% 03/15/01 1,502,130
Mellon Financial Company
675,000 6.500% 12/01/97 677,280
National Australia Bank
$ 3,000,000 9.700% 10/15/98 3,206,685
National Bank of Detroit
800,000 6.500% 05/27/97 803,260
NationsBank Corporation
1,970,000 5.850% 01/17/01 1,892,468
Society Bank of Cleveland
5,000,000 6.875% 10/15/96 5,018,665
-----------
15,083,000
CHEMICALS 1.1%
Arco Chemical Company
2,000,000 9.900% 11/01/00 2,221,080
COMMUNICATION 5.0%
AT&T Capital
4,000,000 6.990% 10/12/96 4,016,760
650,000 6.380% 08/28/98 648,786
International Business Machines Company
1,500,000 6.375% 11/01/97 1,504,327
The accompanying notes to the financial statements are an integral part of this
schedule.
15
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
COMMUNICATION (CONTINUED)
WMX Technologies
$ 850,000 6.250% 04/01/99 $ 844,057
Xerox Corporation
3,000,000 6.840% 06/01/00 3,002,835
-----------
10,016,765
FINANCIAL 16.4%
American General Finance
1,050,000 7.850% 10/10/97 1,070,922
450,000 7.700% 11/15/97 458,934
810,000 8.500% 08/15/98 843,531
Associates Corporation
1,030,000 8.375% 01/15/98 1,061,215
1,400,000 6.375% 08/15/98 1,398,990
BHP Finance Limited
1,590,000 5.625% 11/01/00 1,504,302
Bear Stearns Company
1,300,000 5.750% 02/15/01 1,237,796
Countrywide Funding
1,060,000 6.050% 03/01/01 1,017,063
Fleet Financial Group
2,125,000 6.000% 10/26/98 2,102,687
Ford Motor Credit Company
500,000 7.125% 12/01/97 505,650
1,500,000 8.000% 12/01/97 1,534,827
General Electric Capital Corporation
1,000,000 7.840% 02/05/98 1,025,065
3,850,000 8.100% 01/26/99 4,002,021
The accompanying notes to the financial statements are an integral part of this
schedule.
16
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
FINANCIAL (CONTINUED)
Household Financial Corporation
$ 840,000 6.700% 08/08/97 $ 845,086
International Lease Financial Corporation
2,000,000 6.375% 11/01/96 2,003,430
600,000 5.980% 11/16/98 593,565
1,900,000 7.150% 04/20/98 1,926,347
Merrill Lynch & Company Incorporated
2,110,000 6.510% 03/19/01 2,069,787
Morgan Stanley Company
1,080,000 5.7500% 02/15/01 1,030,141
Norwest Financial Corporation
1,270,000 7.700% 11/15/97 1,294,870
1,260,000 8.500% 08/15/98 1,311,907
Olympia Financial
752,338 6.200% 01/15/02 752,948
Transamerica Financial Corporation
1,000,000 7.180% 07/29/98 1,013,978
Travelers/Aetna P&C
1,360,000 6.750% 04/15/01 1,352,725
Toyota Motor Credit Note
1,060,000 6.800% 04/15/98 1,070,263
----------
33,028,050
INDUSTRIAL 0.6%
Navistar Financial
1,260,000 6.350% 11/15/02 1,260,995
The accompanying notes to the financial statements are an integral part of this
schedule.
17
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
UTILITIES 1.4%
Pacific Gas & Electric
$ 800,000 5.375% 08/01/98 $ 782,853
Trans Canada Pipelines
2,080,000 6.770% 04/30/01 2,058,243
---------
2,841,096
MISCELLANEOUS 1.2%
Walt Disney Company
2,360,000 6.375% 03/30/01 2,317,437
---------
TOTAL CORPORATE OBLIGATIONS 66,768,423
----------
TOTAL LONG-TERM OBLIGATIONS
(COST $183,586,501) 182,556,453
-----------
SHORT-TERM OBLIGATIONS 9.0%
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 6.3%
Federal Home Loan Mortgage Discount Note
12,705,000 5.250% 07/22/96 12,666,091
COMMERCIAL PAPER 2.7%
Cargill Incorporated
401,000 5.400% 07/01/96 401,000
Deutsche Bank
5,000,000 7.498% 01/21/97 5,013,433
----------
TOTAL COMMERCIAL PAPER 5,414,433
----------
TOTAL SHORT-TERM OBLIGATIONS
(AMORTIZED COST $18,080,524) 18,080,524
----------
TOTAL INVESTMENTS
(COST BASIS $201,667,025) 99.7% 200,636,977
CASH AND OTHER ASSETS, LESS
LIABILITIES 0.3% 559,363
--------------
TOTAL NET ASSETS 100.0% $ 201,196,340
--------------
--------------
The accompanying notes to the financial statements are an integral part of this
schedule.
18
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
SHARES OR
PRINCIPAL
EQUITIES 98.9% MARKET VALUE
AEROSPACE & DEFENSE 1.4% ------------
- -------------------
1,800 General Dynamics Corporation $ 111,600
3,600 Lockheed Martin Corporation 302,400
1,500 Rockwell International Corporation 85,875
1,100 Textron Incorporated 87,863
1,700 United Technologies Corporation 195,500
----------
783,238
APPAREL 0.1%
- -------
500 Laidlaw Incorporated 5,063
AUTOMOTIVE 2.9%
- ----------
5,900 Chrysler Corporation 365,800
3,300 Echlin Corporation 124,988
26,200 Ford Motor Company 848,225
4,200 General Motors Corporation 219,975
----------
1,558,988
----------
BANKS 7.4%
- -----
1,760 Banc One Corporation 59,840
5,600 Bank of Boston Corporation 277,200
1,000 Bank of New York Corporation 51,250
1,500 BankAmerica Corporation 113,625
14,200 Barnett Banks Incorporated 866,200
7,496 Chase Manhattan Corporation 529,405
10,000 Citicorp 826,250
37,500 Corporation Bancaria Espana ADR 825,000
2,700 First Union Corporation 164,363
2,400 Mellon Bank Corporation 136,800
800 Morgan (J.P.) & Company 67,700
1,200 NationsBank Corporation 99,150
----------
4,016,783
The accompanying notes to the financial statements are an integral part of this
schedule.
19
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
BASIC INDUSTRIES 1.1% ------------
- ----------------
2,200 Aluminum Company of America $ 126,225
2,200 Asarco Incorporated 60,775
6,500 Crane Company 266,500
2,200 Newmont Mining Corporation 108,625
600 Phelps Dodge Corporation 37,425
200 Timken Company 7,750
----------
607,300
BUSINESS SERVICE 3.6%
- ----------------
1,500 Automatic Data Processing Incorporated 57,938
4,100 Computer Associates International Incorporated 292,125
1,100 Dial Corporation 31,488
12,400 Dun & Bradstreet Corporation 775,000
6,900 National Service Ind. Incorporated 269,963
9,000 Wallace Computer Services Incorporated 537,750
----------
1,964,264
CHEMICALS 2.2%
- ---------
800 Air Products & Chemicals Incorporated 46,200
700 Dow Chemical Company 53,200
1,400 Eastman Chemical Company 85,225
10,500 E.I. duPont de Nemours and Company 830,813
4,500 Monsanto Company 146,250
300 Union Carbide Corporation 11,925
----------
1,173,613
COMMUNICATION 1.7%
- -------------
28,000 New York Times 913,500
600 Tribune Company 43,575
----------
957,075
COMPUTERS & OFFICE EQUIPMENT 7.5%
- ----------------------------
15,300 Amdahl Corporation * 164,475
14,000 Astra ADR 612,500
1,000 Ceridian Corporation* 50,500
The accompanying notes to the financial statements are an integral part of this
schedule.
20
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
COMPUTERS & OFFICE EQUIPMENT (CONTINUED) ------------
- ----------------------------
1,700 Compaq Computer Corporation * $ 83,725
2,000 Digital Equipment* 90,000
100 Honeywell Incorporated 5,450
9,500 International Business Machines Corporation 940,500
3,200 Pitney Bowes Incorporated 152,800
5,400 Sun Microsystems* 317,925
67,500 Tandem Computer Incorporated * 835,313
15,000 Xerox Corporation 802,500
----------
4,055,688
CONSTRUCTION 2.0%
- ------------
2,400 Armstrong World Incorporated 138,300
3,000 Johnson Controls 208,500
800 Kaufman & Broad Home Corporation 11,600
25,000 Masco Corporation 756,250
----------
1,114,650
CONSUMER DURABLES 0.4%
- -----------------
1,500 Brunswick Corporation 30,000
2,500 Eastman Kodak 194,375
----------
224,375
CONSUMER NON-DURABLES 4.3%
- ---------------------
24,500 American Greetings Company 670,688
4,600 Avon Products Incorporated 207,575
14,300 Bandag Incorporated 686,400
10,400 B.F. Goodrich Company 388,700
1,500 Clorox 132,938
2,700 Int'l Flavors & Fragrances Incorporated 128,588
1,200 Procter & Gamble Company 108,750
----------
2,323,639
The accompanying notes to the financial statements are an integral part of this
schedule.
21
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
ELECTRONICS 2.1% ------------
- -----------
9,400 General Electric Company $ 813,100
1,400 Intel Corporation 102,813
2,000 Raytheon Company 103,250
3,200 Tektronix Incorporated 143,200
----------
1,162,363
ENERGY & RELATED 1.8%
- ----------------
1,700 Bemis Company 59,500
4,600 Occidental Petroleum Corporation 113,850
50,000 Owens Illinois Incorporated* 800,000
----------
973,350
ENTERTAINMENT & LEISURE 0.2%
- -----------------------
2,400 Service Corporation International 138,000
FINANCIAL SERVICES 5.0%
- ------------------
4,900 Ahmanson H.F. & Company 132,300
5,400 American Express Company 240,975
28,400 Federal National Mortgage Association 951,400
5,400 Household International Incorporated 410,400
12,500 Student Loan Corporation 450,000
7,200 Student Loan Marketing Association 532,800
----------
2,717,875
FOOD, BEVERAGES & TOBACCO 5.7%
- -------------------------
15,600 Anheuser-Busch Companies, Incorporated 1,170,000
9,000 Campbell Soup Company 634,500
2,400 Coca-Cola Company 117,300
The accompanying notes to the financial statements are an integral part of this
schedule.
22
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
FOOD, BEVERAGES & TOBACCO (CONTINUED) ------------
- -------------------------
8,400 Conagra Incorporated $ 381,150
5,700 Coors 101,888
1,400 CPC International Incorporated 100,800
256 Earthgrains Company 8,384
2,800 Fleming Companies Incorporated 40,250
5,300 Heinz (H.J.) Company 160,988
2,100 Luby's Cafeteria Incorporated 49,350
9,500 Sara Lee Corporation 307,563
700 Sysco Corporation 23,975
----------
3,096,148
GOLD & PRECIOUS METALS 0.1%
- ----------------------
1,200 Placer Dome Incorporated 28,650
HEALTH CARE 11.1%
- -----------
18,000 Abbott Labs Company 783,000
4,200 American Home Products Corporation 252,525
18,900 Baxter International Incorporated 893,025
3,300 Becton Dickinson & Company 264,825
500 Bristol-Meyers/Squibb 45,000
4,400 Johnson & Johnson 217,800
2,400 Lilly Eli & Company 156,000
7,000 Merck & Company 452,375
7,800 Pfizer Incorporated 556,725
28,900 Pharmacia & Upjohn Incorporated 1,282,438
5,900 Schering Plough Corporation 370,225
23,500 St. Jude Medical * 787,250
----------
6,061,188
INSURANCE 3.8%
- ---------
6,001 Allstate Corporation 273,796
6,750 American International Group Incorporated 665,719
2,000 Jefferson Pilot Corporation 103,250
The accompanying notes to the financial statements are an integral part of this
schedule.
23
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
INSURANCE (CONTINUED) ------------
- ---------
12,000 Progressive Corporation Ohio $ 555,000
1,100 Providian Corporation 47,163
3,400 SAFECO Corporation 120,275
1,700 St. Paul Companies Incorporated 90,950
2,700 Transamerica Corporation 218,700
----------
2,074,853
METAL & MINERAL 1.5%
- ---------------
1,200 Homestake Mining Company 20,550
20,000 Minerals Technologies, Incorporated 685,000
4,600 USX Marathon Group 92,575
500 USX- US Steel 14,188
----------
812,313
PAPER & FOREST PRODUCTS 2.9%
- -----------------------
59,000 Asia Pulp & Paper Company * 722,750
5,900 Avery Dennison Corporation 323,763
5,976 International Paper 220,365
2,000 Kimberly Clark Company 154,500
3,700 Weyerhaeuser Company 157,250
----------
1,578,628
PETROLEUM 5.9%
- ---------
2,300 Amoco Corporation 166,463
1,000 Cyprus Amax Mineral Company 22,625
700 Enron 28,613
8,300 Exxon Corporation 721,063
2,300 Mobil Corporation 257,888
8,100 Phillips Petroleum Company 339,188
2,800 Royal Dutch Petroleum Co. N.Y.-ADR 430,500
4,400 Texaco 369,050
39,800 YPF S.A. ADR 895,500
----------
3,230,890
The accompanying notes to the financial statements are an integral part of this
schedule.
24
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
RAILROADS 2.2% ------------
- ---------
2,200 Burlington Northern Incorporated $ 177,925
1,400 CSX Corporation 67,550
1,300 Conrail Incorporated 86,288
900 Norfolk Southern Company 76,275
24,000 Trinity Industries 816,000
----------
1,224,038
RESTAURANTS 1.1%
- -----------
63,000 Ryans Family Steak Houses Incorporated * 582,750
RETAIL STORES 3.8%
- -------------
1,500 Albertson's Incorporated 62,063
2,800 Gap Incorporated 89,950
1,200 Giant Foods Incorporated 43,050
18,500 Kroger Company* 730,750
2,400 Longs Drug Stores 107,100
2,000 May Department Stores 87,500
3,200 Mercantile Stores Incorporated 187,600
320 Payless ShoeSource* 10,160
10,900 Sears Roebuck & Company 530,013
2,800 Supervalu Incorporated 88,200
1,500 TJX Cos Incorporated 50,625
1,100 Walgreen Company 36,850
1,300 Winn-Dixie Stores Incorporated 45,988
----------
2,069,849
SERVICES 1.8%
- --------
600 Briggs & Stratton Corporation 24,675
28,000 COMSAT Corporation 728,000
3,600 John Deere & Company 144,000
1,000 Snap-On Incorporated 47,375
400 Whirlpool Corporation 19,850
----------
963,900
The accompanying notes to the financial statements are an integral part of this
schedule.
25
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
TECHNOLOGY 5.6% ------------
- ----------
11,200 EG&G $ 239,400
6,900 Harris Corporation 420,900
4,400 Hewlett-Packard Company 438,350
30,000 National Semiconductor * 465,000
17,000 Northern Telecom 924,375
600 Perkins-Elmer Corporation 28,950
2,800 Teledyne Incorporated 101,150
4,600 Texas Instruments 229,425
2,700 Thomas & Betts Company 101,250
2,900 WMX Technologies Incorporated 94,975
----------
3,043,775
TEXTILE & APPAREL 0.1%
- -----------------
500 Spring Industries 25,250
TRAVEL & RECREATION 0.1%
- -------------------
1,100 Hilton Hotels Corporation 123,750
UTILITIES-ELECTRIC 1.7%
- ------------------
2,100 American Electric Power Company 89,513
800 Baltimore Gas & Electric Company 22,700
2,100 Carolina Power & Light Company 79,800
800 CINergy Corporation 25,600
5,400 Detroit Edison Company 166,725
4,100 Entergy Corporation 116,338
10,100 Houston Industries 248,713
400 Northern States Power Company 19,750
300 Pacific Enterprises 8,888
2,500 Pacificorp 55,625
500 People's Energy Corporation 16,750
1,000 Unicom Corporation 27,875
1,000 Union Electric Company 40,250
----------
918,527
The accompanying notes to the financial statements are an integral part of this
schedule.
26
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED)
UTILITIES-TELEPHONE 6.1% MARKET VALUE
- ------------------- ------------
4,200 Alltell Corporation $ 129,150
1,300 American Telephone and Telegraph 80,600
15,300 Ameritech Corporation 908,438
3,500 Bell Atlantic Corporation 223,125
10,100 Bell South Corporation 427,988
14,800 GTE Corporation 662,300
3,500 Pacific Telesis Group 118,125
4,500 SBC Communication Incorporated 221,625
7,000 Sprint Corporation 294,000
7,200 US West Incorporated 229,500
----------
3,294,851
MISCELLANEOUS 1.7%
- -------------
700 360 Communication Company* 16,798
4,600 PP&L Resources Incorporated 108,675
36,000 Reading and Bates Corporation* 796,482
----------
921,955
TOTAL COMMON STOCK (COST 44,260,169) 53,827,579
SHORT-TERM OBLIGATIONS 0.7%
- ----------------------
DEMAND NOTES 0.7%
- ------------
General Mills Demand Note
$ 56,718 5.140% 12/31/31 56,718
Southwestern Bell Demand Note
58,410 5.124% 12/31/31 58,410
Pitney Bowes Demand Note
51,538 5.144% 12/31/31 51,538
Wisconsin Electric Demand Note
229,428 5.185% 12/31/31 229,428
----------
TOTAL SHORT-TERM OBLIGATIONS
(AMORTIZED COST $396,094) 396,094
----------
The accompanying notes to the financial statements are an integral part of this
schedule.
27
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
TOTAL INVESTMENTS
(COST BASIS $44,656,263) 99.6% $ 54,223,673
CASH AND OTHER ASSETS, LESS
LIABILITIES 0.4% 211,215
----------
TOTAL NET ASSETS 100.0% $ 54,434,888
----------
----------
* Non-income producing stocks.
The accompanying notes to the financial statements are an integral part of this
schedule.
28
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
SHARES OR
PRINCIPAL
EQUITIES 71.6% MARKET VALUE
AEROSPACE & DEFENSE 0.6% ------------
- -------------------
600 AMR Corporation * $ 54,600
800 Boeing 69,700
600 Delta Airlines 49,800
600 Northwest Airlines Corporation* 23,700
600 United Technologies Corporation 69,000
--------
266,800
AUTOMOTIVE 1.8%
- ----------
20,000 Ford Motor Company 647,500
1,600 General Motors Corporation 83,800
1,600 Lear Seating Corporation * 56,400
--------
787,700
BANKS 5.6%
- -----
1,500 Bank of Boston Corporation 74,250
600 BankAmerica Corporation 45,450
10,000 Barnett Banks Incorporated 610,000
1,040 Chase Manhattan Corporation 73,450
8,700 Citicorp 718,838
33,000 Corp Bancaria Espana ADR 726,000
1,200 Long Island Bancorp Incorporated 36,675
500 Wells Fargo & Company 119,438
--------
2,404,101
BASIC INDUSTRIES 0.3%
- ----------------
300 JLG Industries Incorporated 22,275
1,900 Lennar Corporation 47,500
900 Reynolds Metals 46,913
--------
116,688
BUSINESS SERVICES 3.3%
- -----------------
2,000 American Management Systems* 58,500
1,200 Cisco Systems Incorporated* 67,950
1,250 Computer Associates 89,063
The accompanying notes to the financial statements are an integral part of this
schedule.
29
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
BUSINESS SERVICES (CONTINUED) ------------
- -----------------------------
11,000 Dun & Bradstreet Corporation $ 687,500
900 Noble Affiliates 33,975
8,000 Wallace Computer Services Incorporated 478,000
--------
1,414,988
CHEMICALS 2.3%
- ---------
1,000 Cabot Corporation 24,500
900 Dow Chemical Company 68,400
9,000 E.I. duPont de Nemours and Company 712,125
800 ITT Corporation* 53,000
500 Olin Corporation 44,625
2,300 Praxair Incorporated 97,175
--------
999,825
COMMUNICATION 2.0%
- -------------
24,000 New York Times 783,000
1,700 Time Warner Incorporated 66,725
--------
849,725
COMPUTERS & OFFICE EQUIPMENT 6.9%
- ----------------------------
15,000 Astra ADR 656,250
7,200 International Business Machines Corporation 712,800
1,600 Sun Microsystems* 94,200
55,000 Tandem Computer Incorporated * 680,625
15,600 Xerox Corporation 834,600
--------
2,978,475
CONSTRUCTION 1.4%
- ------------
20,000 Masco Corporation 605,000
CONSUMER DURABLES 0.2%
- -----------------
1,300 Eastman Kodak 101,075
The accompanying notes to the financial statements are an integral part of this
schedule.
30
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
CONSUMER NON-DURABLES 2.3% ------------
- ---------------------
19,000 American Greetings Company $ 520,125
10,000 Bandag Incorporated 480,000
-----------
1,000,125
ELECTRONICS 1.9%
- -----------
3,500 General Electric Company 302,750
1,000 Memc Electronic Materials* 38,750
23,000 National Semiconductor * 356,500
700 Newbridge Network Corporation* 45,850
600 Solectron Corporation* 22,725
1,300 UCAR International, Incorporated* 54,113
--------
820,688
ENERGY & RELATED 3.3%
- ----------------
2,300 Baker Hughes Incorporated 75,613
900 British Petroleum PLC ADR 96,188
900 Ensco International Incorporated * 29,250
1,300 Halliburton Company 72,150
500 Kerr-McGee Company 30,438
2,900 Occidental Petroleum Corporation 71,775
5,200 Oryx Energy* 84,500
50,300 Owens Illinois Incorporated * 804,800
800 Sonat Offshore Drilling Incorporated 40,400
2,300 Sun Company 69,863
900 Western Atlas Incorporated * 52,425
--------
1,427,402
ENTERTAINMENT & LEISURE 0.4%
- -----------------------
1,300 CUC International Incorporated* 46,150
1,100 MGM Grand Incorporated* 43,863
800 Mirage Resorts Incorporated* 43,200
1,500 Patriot American Hospitality 44,438
--------
177,651
The accompanying notes to the financial statements are an integral part of this
schedule.
31
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
FINANCIAL SERVICES 4.4% ------------
- -------------------
1,300 First USA Incorporated $ 71,500
18,200 Federal National Mortgage Association 609,700
1,600 Green Tree Financial Corporation 50,000
2,900 Lehman Brothers Holdings 71,775
2,600 Liberty Property Beneficial Trust 51,675
800 Primark Corporation* 26,100
10,000 Student Loan Corporation 360,000
7,000 Student Loan Marketing Association 518,000
1,650 Travelers Group Incorporated 75,281
2,300 WFS Financial Incorporated* 51,750
--------
1,885,781
FOOD, BEVERAGES & TOBACCO 2.3%
- -------------------------
9,000 Anheuser-Busch Companies, Incorporated 675,000
2,000 Dole Foods Company 86,000
2,900 Nabisco Holdings Corporation 102,588
4,300 Sara Lee Corporation 139,213
--------
1,002,801
GOLD & PRECIOUS METALS 0.2%
- ----------------------
5,600 Santa Fe Pacific Gold Corporation 79,100
HEALTH CARE 8.1%
- -----------
13,000 Abbott Labs 565,500
3,300 American Home Products Corporation 198,413
1,000 Appria Healthcare Group* 31,375
17,200 Baxter International Incorporated 812,700
800 Cardinal Health, Incorporated 57,500
700 Elan Corporation ADS* 39,988
1,245 Guidant Corporation 61,316
The accompanying notes to the financial statements are an integral part of this
schedule.
32
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
HEALTH CARE (CONTINUED) ------------
- -----------------------
2,900 Healthsouth Corporation* $ 104,400
3,000 Ornda Healthcorp* 72,000
18,000 Pharmacia & Upjohn Incorporated 798,750
20,500 St. Jude Medical* 686,750
1,500 US Surgical Corporation 46,500
--------
3,475,192
INSURANCE 3.6%
- ---------
1,000 AETNA Life & Casualty Company 71,500
2,110 Allstate Corporation 96,269
5,900 American International Group Incorporated 581,888
900 CIGNA Corporation 106,088
2,900 Everest Reinsurance Holdings 75,038
500 Potash Corporation 33,125
12,300 Progressive Corporation Ohio 568,875
--------
1,532,783
METAL & MINERAL 1.3%
- ---------------
1,300 AK Steel Holding Corporation 50,863
15,000 Minerals Technologies Incorporated 513,750
--------
564,613
PAPER & FOREST PRODUCTS 1.4%
- -------------------------
44,000 Asia Pulp & Paper Company * 539,000
1,100 Weyerhaeuser Company 46,750
--------
585,750
PETROLEUM 2.3%
- ---------
1,000 Columbia Gas System, Incorporated 52,125
800 Diamond Offshore Drilling* 45,800
2,700 Global Marine Incorporated* 37,463
500 Mobil Corporation 56,063
35,000 YPF S.A. ADR 787,500
--------
978,951
The accompanying notes to the financial statements are an integral part of this
schedule.
33
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
RAILROAD 1.4% -----------
- --------
1,000 Conrail Incorporated $ 66,375
15,400 Trinity Industries 523,600
--------
589,975
RETAIL STORES 2.9%
- -------------
1,875 Dollar General Corporation 54,844
2,900 Federated Department Stores* 98,963
3,000 GAP Incorporated 96,375
15,000 Kroger Company 592,500
2,100 Revco Drug Stores Incorporated* 50,138
3,000 Safeway Incorporated * 99,000
1,000 Sears Roebuck & Company 48,625
800 Tiffany & Company 58,400
2,200 TJX Cos Incorporated 74,250
2,500 Toys R Us Incorporated* 71,250
--------
1,244,345
SERVICES 2.1%
- --------
2,100 John Deere & Company 84,000
1,650 Olsten Corporation 48,469
70,000 Ryans Family Steak Houses Incorporated * 647,500
1,650 Stewart Enterprises Incorporated 51,563
1,800 U.S.A. Waste Services Incorporated* 53,325
--------
884,857
TECHNOLOGY 2.7%
- ----------
700 Amgen* 37,800
1,500 Centocor Incorporated* 44,813
2,000 Komag Incorporated * 52,750
1,200 Neurex Corporation* 26,250
18,000 Northern Telecom 978,750
400 Viasoft Incorporated* 25,850
--------
1,166,213
The accompanying notes to the financial statements are an integral part of this
schedule.
34
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
TELECOMMUNICATION 1.9% ------------
- ------------------
24,500 COMSAT Corporation $ 637,000
1,800 Lucent Technologies 68,175
1,400 Parametric Technologies Company 60,725
800 U.S. Robotics Corporation 68,400
--------
834,300
TEXTILE & APPAREL 0.4%
- -----------------
2,000 Liz Claiborne Incorporated 69,250
2,000 Nautica Enterprises Incorporated* 57,500
500 NIKE, Incorporated 51,375
--------
178,125
UTILITIES -ELECTRIC 0.4%
4,900 General Public Utilities 172,725
UTILITIES -GAS 1.7%
- --------------
350 Chesapeake Energy Corporation* 31,456
31,000 Reading and Bates Corporation* 685,875
--------
717,331
UTILITIES -TELEPHONE 2.1%
- --------------------
12,000 Ameritech Corporation 712,500
2,100 GTE Corporation 93,975
2,000 Teleport Communications* 38,250
1,400 Worldcom Incorporated* 77,525
--------
922,250
MISCELLANEOUS 0.2%
- -------------
900 Excel Limited 63,450
1,100 Input/Output, Incorporated* 35,613
--------
99,063
TOTAL COMMON STOCK (COST $25,128,690) 30,864,398
The accompanying notes to the financial statements are an integral part of this
schedule.
35
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
TOTAL LONG-TERM OBLIGATIONS 21.8% MARKET VALUE
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 12.0% ------------
- --------------------------------------
United States Treasury Bonds
$ 30,000 7.125% 02/15/23 $ 30,309
70,000 6.000% 02/15/26 62,103
United States Treasury Notes
370,000 5.250% 12/31/97 366,184
300,000 5.875% 04/30/98 298,969
860,000 6.375% 05/15/99 862,418
190,000 6.875% 03/31/00 192,909
100,000 6.500% 05/31/01 100,031
200,000 6.625% 06/30/01 201,312
20,000 6.875% 05/15/06 20,225
Federal Home Loan Mortgage Corporation
197,810 6.500% 03/01/26 185,509
1,500,000 7.000% 07/01/26 1,446,082
Federal National Mortgage Association
513,634 9.000% 08/01/07 536,757
Government National Mortgage Association
(mortgage-backed securities)
189,233 10.000% 12/15/20 206,078
458,393 7.000% 06/20/25 460,744
200,000 8.000% 07/01/26 201,999
-------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 5,171,629
ASSET BACKED OBLIGATIONS 2.6%
Asset Security Corporation
198,914 6.920% 02/14/29 Series 1996-D2 192,947
99,154 7.100% 08/13/29 Series 1995-MD4 97,418
Chevy Chase Home Loan
200,000 7.150% 05/15/15 Series 1996(1) 200,250
The accompanying notes to the financial statements are an integral part of this
schedule.
36
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
TOTAL LONG-TERM OBLIGATIONS (CONTINUED) MARKET VALUE
------------
ASSET BACKED OBLIGATIONS (CONTINUED)
- ------------------------
Nomura Asset Securities Corporation
$ 70,000 7.120% 04/13/36 Series 1996-M $ 68,250
Resolution Trust Corporation
318,962 6.529% 04/25/22 Series 1992(9) 311,588
250,010 6.995% 06/25/24 243,447
--------
TOTAL ASSET BACKED OBLIGATIONS 1,113,900
CORPORATE OBLIGATIONS 7.2%
AEROSPACE & DEFENSE 0.4%
- -------------------
Lockheed Martin
120,000 6.625% 06/15/98 120,550
70,000 7.450% 06/15/04 71,014
--------
191,564
BANK 0.4%
- ----
Banque Paribas
200,000 6.875% 03/01/09 185,406
COMMUNICATION 0.7%
- -------------
Time Warner Company
105,000 9.150% 02/01/23 108,464
200,000 8.375% 07/15/33 194,988
--------
303,452
ELECTRONICS 0.7%
- -----------
Hydro-Quebec
300,000 8.250% 04/15/26 311,229
FINANCIAL 3.0%
- ---------
British Gas Financial
700,000 0.000% 11/04/21 effective yield 6.850% 94,063
Commercial Credit Company
350,000 7.875% 02/01/25 372,253
The accompanying notes to the financial statements are an integral part of this
schedule.
37
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
TOTAL LONG-TERM OBLIGATIONS (CONTINUED) MARKET VALUE
------------
CORPORATE OBLIGATIONS (CONTINUED)
FINANCIAL (CONTINUED)
- --------------------
Equitable Companies
$ 240,000 9.000% 12/15/04 $ 264,584
Ford Motor Credit Company
30,000 8.875% 08/01/96 30,074
General Electric Capital Corporation
260,000 8.200% 10/30/03 280,228
Hanson America Convertible
125,000 2.390% 03/01/01 107,188
Salomon Incorporated
150,000 6.750% 02/15/03 143,860
---------
1,292,250
TELECOMMUNICATION 0.6%
- -----------------
TCI Communications Incorporated
150,000 8.750% 08/01/15 147,126
110,000 7.875% 02/15/26 96,982
-------
244,108
UTILITIES 0.9%
- ---------
Long Island Lighting
240,000 9.625% 07/01/24 240,365
System Energy
142,872 7.430% 01/15/11 132,057
-------
372,422
MISCELLANEOUS 0.5%
- -------------
News American Holdings
200,000 8.875% 04/26/23 212,408
--------
TOTAL CORPORATE OBLIGATIONS 3,112,839
---------
TOTAL LONG-TERM OBLIGATIONS
(COST $9,372,889) 9,398,368
---------
The accompanying notes to the financial statements are an integral part of this
schedule.
38
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
TOTAL SHORT-TERM OBLIGATIONS 10.0% MARKET VALUE
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 6.4% ------------
- --------------------------------------
United States Treasury Bills
(A) $ 20,000 4.970% 07/05/96 $ 19,989
(A) 2,479,000 4.945% 07/18/96 2,473,369
155,000 5.380% 07/25/96 264,180
--------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 2,757,538
DEMAND NOTES 3.6%
- ------------
American Family Demand Note
71,640 5.145% 12/31/31 71,640
General Mills Demand Note
369,946 5.140% 12/31/31 369,946
Johnson Controls Demand Note
470,325 5.165% 12/31/31 470,325
Pitney Bowes Demand Note
231,961 5.144% 12/31/31 231,961
Warner Lambert Demand Note
144,733 5.115% 12/31/31 144,733
Wisconsin Electric Demand Note
320,745 5.185% 12/31/31 320,745
--------
TOTAL DEMAND NOTES 1,609,350
TOTAL SHORT-TERM OBLIGATIONS
(AMORTIZED COST $4,366,888) 4,366,888
---------
The accompanying notes to the financial statements are an integral part of this
schedule.
39
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES, PRINCIPAL OR
NUMBER OF CONTRACTS
OPTIONS- PURCHASED 0.0%
- -------------------
Call Options Eurodollar Futures
14 Expiring September 1996 $ 1,050
Call Options Eurodollar Futures
4 Expiring December 1996 3,700
Put Options Eurodollar Futures
1 Expiring September 1996 125
---
TOTAL OPTIONS PURCHASED 4,875
-----
(COST $5,293)
TOTAL INVESTMENTS
(COST BASIS $38,873,760) 44,634,529
----------
OPTIONS- WRITTEN 0.0%
- ----------------
4 Call Options Year Treasury Note (5,250)
Expiring September 1996
4 Call Options 5 Year Treasury Bond (3,063)
Expiring September 1996
1 Put Options Eurodollar Futures
Expiring September 1996 (125)
-----
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $6,321) (8,438)
--------
TOTAL INVESTMENTS NET OF
OUTSTANDING WRITTEN OPTIONS 103.4% 44,626,091
CASH AND OTHER ASSETS, LESS
LIABILITIES -3.4% (1,495,667)
------------
TOTAL NET ASSETS 100.0% $ 43,130,424
-------------
-------------
* Non-income producing stocks.
The accompanying notes to the financial statements are an integral part of this
schedule.
40
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
(A) $120,000 OF U.S. TREASURY BILLS PLEDGED AS MARGIN FOR FUTURES CONTRACTS.
THE PORTFOLIO HAD THE FOLLOWING OPEN FUTURES CONTRACTS AT JUNE 30, 1996:
OPEN FUTURES CONTRACTS:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF PRINCIPAL GAINS (LOSSES)
TYPE CONTRACTS AMOUNT POSITION EXPIRATION JUNE 30, 1996
---- --------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
5 Year Treasury Note 22 22,000 Long September 1996 $29,866
10 Year U.S. Treasury Notes 5 5,000 Long September 1996 10,588
Bond Futures 6 6,000 Short September 1996 (17,071)
-------
$23,383
-------
-------
</TABLE>
The accompanying notes to the financial statements are an integral part of this
schedule.
41
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
AS OF JUNE 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C> <C> <C>
Investments, at market value $ 57,449,170 $ 200,636,977 $ 54,223,673 $ 44,634,529
Receivable for investments sold 1,147,730 3,138,910 0 133,428
Receivable for shares sold 97,387 115,291 136,100 143,754
Cash 6,593 4,601 1,879 2,371
Dividends and interest receivable 651,330 3,032,339 80,306 159,996
Futures variation margin 18,437 0 0 8,188
Prepaid insurance 6,842 26,488 7,062 5,599
------------- ------------- ------------- -------------
Total Assets $ 59,377,489 $ 206,954,606 $ 54,449,020 $ 45,087,865
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES:
Payable for investments purchased $ 5,988,346 $ 5,523,261 $ 0 $ 1,920,160
Payable for shares redeemed 831 826 43 1,277
Payable for dividends 49,159 192,669 0 0
Outstanding written options 25,438 0 0 8,438
Accrued expenses and other
liabilities 21,651 41,510 14,089 27,566
------------- ------------- ------------- -------------
Total Liabilities 6,085,425 5,758,266 14,132 1,957,441
------------- ------------- ------------- -------------
NET ASSETS $ 53,292,064 $ 201,196,340 $ 54,434,888 $ 43,130,424
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net Assets consist of:
Capital Stock ($0.01 par value
and 200 million shares
authorized) and Paid-in Capital $ 55,858,686 $ 205,459,182 $ 40,538,585 $ 35,002,103
Undistributed
net investment income 0 0 43,429 787,475
Accumulated net realized gain
(loss) on investments sold (2,273,792) (3,232,794) 4,285,464 1,558,811
Net unrealized appreciation
(depreciation) of investments,
futures and options (292,830) (1,030,048) 9,567,410 5,782,035
------------- ------------- ------------- -------------
Total Net Assets $ 53,292,064 $ 201,196,340 $ 54,434,888 $ 43,130,424
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Number of Shares Outstanding
at the end of year 5,536,063 19,890,517 3,094,286 3,222,380
------------- ------------- ------------- -------------
NET ASSET VALUE
Per Share $ 9.63 $ 10.12 $ 17.59 $ 13.38
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
42
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Interest income $ 3,390,763 $ 11,848,401 $ 57,248 $ 884,474
Dividends 0 0 1,074,610 545,078
------------- ------------- ------------- -------------
Total investment income $ 3,390,763 $ 11,848,401 $ 1,131,858 $ 1,429,552
EXPENSES:
Custodian fees $ 21,906 $ 44,695 $ 16,308 $ 26,726
Accounting fees 38,824 68,778 30,328 32,406
Transfer agent fees 6,326 23,954 6,118 5,521
Legal fees 5,958 5,958 5,958 5,958
Audit and tax return fees 15,138 15,138 15,138 15,138
Director fees and expenses 5,374 5,374 5,374 5,374
Officers and directors insurance 7,653 30,205 5,629 6,676
Administrative and other fees 3,256 1,119 3,982 2,420
------------- ------------- ------------- -------------
Total Expenses $ 104,435 $ 195,221 $ 88,835 $ 100,219
NET INVESTMENT INCOME $ 3,286,328 $ 11,653,180 $ 1,043,023 $ 1,329,333
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gain
on investments sold 313,018 657,870 5,931,111 4,922,203
Net realized gain (loss) on
closed futures and options contracts 15,650 0 0 (54,483)
Net change in unrealized appreciation
(depreciation) of investments,
futures and options (1,600,342) (2,783,917) 4,737,172 1,636,437
------------- ------------- ------------- -------------
NET GAIN ON INVESTMENTS (1,271,674) (2,126,047) 10,668,283 6,504,157
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,014,654 $ 9,527,133 $ 11,711,306 $ 7,833,490
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
43
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FULL MATURITY LIMITED MATURITY
FIXED INCOME PORTFOLIO FIXED INCOME PORTFOLIO
----------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
- -------------------------------------------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income $ 3,342,918 $ 3,286,328 $ 11,596,443 $ 11,653,180
Net realized gain (loss) on investments
sold and closed futures and
options contracts (817,628) 328,668 (1,238,723) 657,870
Net change in unrealized appreciation
(depreciation) of investments,
futures and options 3,055,280 (1,600,342) 3,886,124 (2,783,917)
------------- ------------- ------------- -------------
Net increase in net assets resulting
from operations 5,580,570 2,014,654 14,243,844 9,527,133
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (3,342,683) (3,286,328) (11,594,989) (11,653,180)
Capital gains distribution -- -- -- --
------------- ------------- ------------- -------------
Net decrease in net assets
resulting from distributions $(3,342,683) $(3,286,328) $(11,594,989) $(11,653,180)
SHARE TRANSACTIONS:
Subscriptions of fund shares 2,165,737 17,301,502 78,507,554 54,975,361
Investment income dividends
reinvested 2,919,216 2,653,135 9,423,494 9,241,385
Capital gains distribution
reinvested -- -- -- --
------------- ------------- ------------- -------------
Gross increase in fund shares 5,084,953 19,954,637 87,931,048 64,216,746
Redemptions of fund shares (16,200,704) (5,265,318) (93,265,901) (47,750,515)
------------- ------------- ------------- -------------
Net increase (decrease) from
share transactions (11,115,751) 14,689,319 (5,334,853) 16,466,231
------------- ------------- ------------- -------------
Net increase (decrease) in net assets $ (8,877,864) $ 13,417,645 $(2,685,998) $ 14,340,184
TOTAL NET ASSETS:
Beginning of period 48,752,283 39,874,419 189,542,154 186,856,156
------------- ------------- ------------- -------------
End of period $ 39,874,419 $ 53,292,064 $ 186,856,156 $ 201,196,340
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Undistributed net investment income 235 0 0 0
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
44
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DIVERSIFIED EQUITY PORTFOLIO BALANCED PORTFOLIO
----------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
- -------------------------------------------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income $ 631,897 $ 1,043,023 $ 2,024,214 $ 1,329,333
Net realized gain on investments
sold and closed futures and
options contracts 954,231 5,931,111 1,096,459 4,867,720
Net change in unrealized appreciation
of investments, futures and options 3,907,331 4,737,172 4,122,641 1,636,437
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations 5,493,459 11,711,306 7,243,314 7,833,490
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (591,777) (1,045,999) (1,289,346) (1,344,443)
Capital gains distribution (2,541,447) (2,212,939) (1,975,282) (3,650,612)
------------ ------------ ------------ ------------
Net decrease in net assets
resulting from distributions $ (3,133,224) $ (3,258,938) $ (3,264,628) $ (4,995,055)
SHARE TRANSACTIONS:
Subscriptions of fund shares 14,329,258 8,994,364 4,150,394 1,576,359
Investment income dividends
reinvested 591,122 1,046,655 1,234,015 1,287,967
Capital gains distribution
reinvested 2,541,447 2,212,939 1,866,512 3,409,871
------------ ------------ ------------ ------------
Gross increase in fund shares 17,461,827 12,253,958 7,250,921 6,274,197
Redemptions of fund shares (2,734,698) (5,905,325) (11,107,139) (12,628,112)
------------ ------------ ------------ ------------
Net increase (decrease) from
share transactions 14,727,129 6,348,633 (3,856,218) (6,353,915)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets $ 17,087,364 $ 14,801,001 $ 122,468 $ (3,515,480)
TOTAL NET ASSETS:
Beginning of period 22,546,523 39,633,887 46,523,436 46,645,904
------------ ------------ ------------ ------------
End of period $ 39,633,887 $ 54,434,888 $ 46,645,904 $ 43,130,424
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Undistributed net investment income $ 46,405 $ 43,429 $ 802,585 $ 787,475
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
45
<PAGE>
AHA INVESTMENT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting
policies of Full Maturity Fixed Income, Limited Maturity Fixed Income,
Diversified Equity and Balanced Portfolios (the "Portfolios"), each a series of
AHA Investment Funds, Inc., a Maryland corporation, ("Fund").
SECURITY VALUATIONS
All securities are recorded at fair market value as of June 30, 1996. Securities
traded on national securities exchanges are valued at last reported sales prices
or, if there are no sales, at the latest bid quotation. Each over-the-counter
security for which the last sale price is available from NASDAQ is valued at
that price. All other over-the-counter securities for which reliable quotations
are available are valued at the latest bid quotation. Securities convertible
into equity securities are valued at the greater of latest bid valuation or net
conversion value. Other assets and securities are valued by a method that the
Board of Directors believes represents a fair value.
ACCOUNTING FOR FUTURES
The Fund may enter into long or short positions in futures contracts in order to
hedge against the effect of changing values on portfolio securities held. When
the Fund enters into a futures contract, it is required to deposit, into a
segregated account at its custodian bank, U.S. Government securities as a
guarantee that it will meet the futures commitment. Each day the Fund receives
or pays cash, called "variation margin," equal to the daily change in the market
value of the futures contracts. Such receipts and payments are recorded as
unrealized gains or losses until the futures contracts expire or are closed out.
Risks of entering into futures contracts include the possibility that there may
be an illiquid market at the time the Portfolios seek to close out a contract
and changes in the value of the futures contract may not correlate with changes
in the value of the portfolio securities being hedged. The Full Maturity Fixed
Income and Balanced Portfolios had open futures contracts as of June 30, 1996.
ACCOUNTING FOR OPTIONS
The Fund may purchase and write (sell) put and call options on U.S. securities,
stock indices, and futures contracts that are traded on U.S. securities
exchanges and over-the-counter markets.
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR OPTIONS (CONTINUED)
The risk associated with purchasing an option is that the Fund pays a premium
whether or not the option is exercised. Additionally, the Fund bears the risk of
loss of premium and change in market value should the counterparty not perform
under the contract. Put and call options purchased are accounted for in the same
manner as portfolio securities. The cost of securities acquired through the
exercise of call options is increased by premiums paid. The proceeds from
securities sold through the exercise of put options are decreased by the
premiums paid.
When the Fund writes an option, the premium received by the Fund is recorded as
a liability and is subsequently adjusted to the current market value of the
option written. Premiums received from writing options which expire unexercised
are recorded by the Fund on the expiration date as realized gains from option
transactions. The difference between the premium and the amount paid on
effecting a close purchase transaction, including brokerage commissions, is also
treated as a realized gain, or if the premium is less than the amount paid for
the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security or currency purchased by the Fund. In writing an option, the Fund bears
the market risk of an unfavorable change in the price of the security or
currency underlying the written option. Exercise of an option written by the
Fund could result in the Fund selling or buying a security or currency at a
price different from the current market value. Transactions in put options
written for the year ending June 30, 1996 for the Fund were as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FULL MATURITY
FIXED INCOME BALANCED
--------------------- ---------------------
NUMBER OF PREMIUMS NUMBER OF PREMIUMS
CONTRACTS (000'S) CONTRACTS (000'S)
- --------------------------------------------------------------------------------
Options Outstanding at -- -- -- --
Beginning of Year
Options Written 107 $93,691 39 $37,379
Options Terminated in Closing 77 $40,015 30 $18,375
Purchase Transactions
Options Expired 2 $985 -- --
Options Outstanding at 28 $25,438 9 $8,438
6/30/96
- --------------------------------------------------------------------------------
47
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT OBJECTIVES
FULL MATURITY FIXED INCOME PORTFOLIO
Seeks over the long term the highest level of income consistent with
preservation of capital. Invests primarily in high quality fixed income
securities. There is no restriction on the maximum maturity of the securities
purchased. The average dollar-weighted maturity will vary and may exceed 20
years.
LIMITED MATURITY FIXED INCOME PORTFOLIO
Seeks a high level of current income, consistent with preservation of capital
and liquidity. Invests primarily in high quality fixed income securities and
maintains an average dollar-weighted portfolio maturity of five years or less.
DIVERSIFIED EQUITY PORTFOLIO
Seeks long-term capital growth. Invests primarily in equity securities and
securities having equity characteristics.
BALANCED PORTFOLIO
Seeks a combination of growth of capital and income. Invests varying proportions
of its assets in equity and fixed income securities, with not less than 25
percent of total assets invested in fixed income securities.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to any of the types
of securities in which they are authorized to invest without regard to the
maturity of the underlying security. Repurchase agreements will be effected only
with banks, savings institutions and broker-dealers. They involve the purchase
by a Portfolio of a debt security with the condition that, after a stated period
of time, the original seller will buy back the same security at a predetermined
price or yield. Repurchase agreements are used to enhance liquidity and to earn
income for periods as short as overnight. To minimize risk, the securities
underlying each repurchase agreement will be maintained with the Fund's
custodian, or a subcustodian, in an amount at least equal in value to the
repurchase price under the agreement (including accrued interest thereunder),
and such agreements will only be effected with parties that meet certain
creditworthiness standards. However, in the event the other party to the
repurchase agreement fails to repurchase the securities subject to such
agreement, a Portfolio could suffer a loss to the extent it is precluded from
selling the securities or, if due to delays, proceeds from the sale are less
than the repurchase price. The Fund had no outstanding repurchase agreements as
of June 30, 1996.
48
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES
No provision is made for Federal Income Taxes since the Portfolios elect to be
taxed as "regulated investment companies" and make such distributions to their
shareholders as to be relieved of all Federal income taxes under provisions of
current Federal tax law. At June 30, 1996, the Funds' most recent fiscal year
end, the approximate capital loss carryforwards for U.S. Federal income tax
purposes for the Full Maturity Fixed Income Portfolio and the Limited Maturity
Fixed Income Portfolio were approximately $2,200,000 and $3,200,000
respectively. This capital loss carryforward expires beginning in the year
ending June 30, 2003 and is available to offset future capital gains.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
OTHER INFORMATION
The accounts of the Fund are kept on the accrual basis of accounting. Securities
transactions are recorded on the trade date. Realized gains or losses from sales
of securities are determined on the specific identification cost basis. Dividend
income is recognized on the ex-dividend date.
NOTE 2.
FUND DISTRIBUTIONS
The Full Maturity Fixed Income Portfolio and the Limited Maturity Fixed Income
Portfolio declare income dividends from net investment income daily and pay
these dividends monthly, on the last day of every month.
In the Diversified Equity Portfolio and Balanced Portfolio, dividends from net
investment income are declared on the thirteenth day of the last month of each
quarter; the ex-dividend date is the fourteenth; and payment is made on the
fifteenth. The aggregate distributions of net investment income for the
Diversified Equity Portfolio and Balanced Portfolio were $0.35 and $0.41 per
share, respectively, during the year ended June 30, 1996.
During the year ended June 30, 1996, the Diversified Equity and Balanced
Portfolios made a long-term capital gain distribution of $0.295 and $0.747 per
share, respectively.
During the year ended June 30, 1996, the Diversified Equity and Balanced
Portfolios made a short-term capital gain distribution of $0.443 and $0.486 per
share, respectively.
49
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3.
DIRECTORS' FEES AND TRANSACTIONS WITH AFFILIATES
Directors not affiliated with Hewitt Associates LLC ("Hewitt") or American
Hospital Association ("AHA") receive $1,000 for each quarterly meeting and $500
for each special meeting of the Board of Directors, or committee thereof, (plus
travel expenses). No remuneration has been paid to any principal or employee of
the Fund's investment consultant, Hewitt, or any director or officer of AHA. The
investments of the Portfolios are managed by various advisory organizations
which serve as the investment managers. The Fund pays no fees to Hewitt or to
the investment managers.
Hewitt is compensated for its services by the shareholders pursuant to The
Program Services Agreement it has with each shareholder, under which Hewitt
provides asset allocation consulting and certain other services. Fees of the
investment managers are paid by Hewitt.
Hewitt has voluntarily undertaken to pay certain expenses of the Portfolios (or
to reimburse the Portfolios for certain expenses) as may be necessary to limit
total expenses of the Portfolios to specified amounts. American Hospital
Association Services, Inc. has, in this regard, agreed to reimburse Hewitt for
one-half of the amounts incurred by Hewitt pursuant to this undertaking. The
maximum expense as a percent of average net assets for the Full Maturity Fixed
Income Portfolio, the Limited Maturity Fixed Income Portfolio, the Diversified
Equity Portfolio, and the Balanced Portfolio is 0.50% (annual percentage). The
Portfolios have reached asset levels which allow the reduction of expenses to
percentage amounts below that set forth above. The Portfolios may reimburse
Hewitt for the expenses of the Portfolios it voluntarily has absorbed on or
after September 1, 1989, provided that such reimbursement does not cause the
percentage expense limitations set forth above to be exceeded and is approved by
the Board of Directors of the Fund. There is no commitment, however, by the Fund
to make any such reimbursement. As of June 30, 1996, approximate expenses paid
on behalf of or reimbursed to the Portfolio by Hewitt since September 1, 1989
were: $101,400 for the Full Maturity Fixed Income Portfolio; $41,000 for the
Limited Maturity Fixed Income Portfolio; $116,000 for the Diversified Equity
Portfolio; and $10,900 for the Balanced Portfolio.
NOTE 4.
SHORT-TERM DEBT
To facilitate portfolio liquidity, each Portfolio is authorized to borrow
against portfolio securities. During the year ended June 30, 1996, there were no
borrowings.
50
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5.
INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of securities (exclusive
of short-term obligations) for the year ended June 30, 1996, is presented below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO PURCHASES SALES
- --------------------------------------------------------------------------------
Full Maturity Fixed Income $154,551,736 $139,094,044
Limited Maturity Fixed Income $250,005,397 $236,517,528
Diversified Equity $ 33,514,750 $ 27,716,929
Balanced $ 60,892,929 $ 68,408,365
- --------------------------------------------------------------------------------
At June 30, 1996, gross unrealized appreciation and depreciation of investments
on a tax basis and the cost of investments for financial reporting purposes and
for Federal income tax purposes were as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COST OF INVESTMENTS
-------------------------
FINANCIAL FEDERAL
PORTFOLIO APPRECIATION DEPRECIATION REPORTING INCOME TAX
- --------------------------------------------------------------------------------
Full Maturity
Fixed Income $ 444,569 $ 737,399 $ 57,780,906 $ 57,780,906
Limited Maturity
Fixed Income $ 373,403 $1,403,451 $201,667,025 $201,667,025
Diversified Equity $10,346,080 $ 778,670 $ 44,656,263 $ 44,656,263
Balanced $ 6,450,996 $ 668,961 $ 38,873,760 $ 38,873,760
- --------------------------------------------------------------------------------
51
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6.
TRANSACTIONS IN CAPITAL STOCK SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1996
-------------------------------------------------------
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------
Transactions in capital stock shares
were as follows:
Subscriptions of fund
shares 1,752,269 5,384,961 563,437 121,597
Investment income dividends
reinvested 269,138 904,877 62,641 97,469
Capital gains distribution
reinvested 0 0 139,442 273,885
----------- ---------- ----------- -----------
Gross increase in fund
shares 2,021,407 6,289,838 765,520 492,951
Redemptions of fund
shares (520,065) (4,674,879) (355,860) (963,559)
----------- ---------- ----------- -----------
Net increase (decrease)
in fund shares 1,501,342 1,614,959 409,660 (470,608)
Beginning of Year 4,034,721 18,275,558 2,684,626 3,692,988
----------- ---------- ----------- -----------
End of Year 5,536,063 19,890,517 3,094,286 3,222,380
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1995
------------------------------------------------------
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------
Transactions in capital stock shares
were as follows:
Subscriptions of
fund shares 228,554 7,784,289 1,014,426 355,698
Investment income dividends
reinvested 308,551 936,142 41,675 103,437
Capital gains distribution
reinvested 0 0 200,588 166,802
----------- ---------- ----------- -----------
Gross increase in fund
shares 537,105 8,720,431 1,256,689 625,937
Redemptions of fund
shares (1,645,123) (9,226,451) (194,347) (921,372)
----------- ---------- ----------- -----------
Net increase (decrease)
in fund shares (1,108,018) (506,020) 1,062,342 (295,435)
Beginning of Year 5,142,739 18,781,578 1,622,284 3,988,423
----------- ---------- ----------- -----------
End of Year 4,034,721 18,275,558 2,684,626 3,692,988
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
- --------------------------------------------------------------------------------
52
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
FULL MATURITY FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
-------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.30 $10.01 $10.03 $10.58 $10.76 $9.48 $9.88
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.55* 0.78* 0.79* 0.75 0.72 0.59 0.65 0.65
Net realized and unrealized gain (loss)
on investments and futures 0.30 (0.29) 0.02 0.64 0.53 (0.64) 0.40 (0.25)
--------- -------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 0.85 0.49 0.81 1.39 1.25 (0.05) 1.05 0.40
LESS DISTRIBUTIONS:
Net investment income (0.55) (0.78) (0.79) (0.75) (0.72) (0.59) (0.65) (0.65)
Net realized capital gains (0.00) (0.00) (0.00) (0.09) (0.35) (0.64) (0.00) (0.00)
--------- -------- -------- -------- -------- -------- -------- --------
Total Distributions (0.55) (0.78) (0.79) 0.84) (1.07) (1.23) (0.65) (0.65)
--------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.30 $ 10.01 $ 10.03 $ 10.58 $ 10.76 $ 9.48 $ 9.88 $ 9.63
--------- -------- -------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN ON NET ASSET VALUE(B) 8.60% 4.62% 7.87% 13.66% 11.98% -1.43% 10.99% 3.58%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands) $1,422 $11,134 $19,893 $47,500 $52,094 $48,752 $39,874 $53,292
Ratio of Expenses to Average Net Assets 0.50%* 0.50%* 0.50%* 0.42% 0.27% 0.24% 0.21% 0.21%
Ratio of Net Investment Income to
Average Net Assets 8.12%* 8.44%* 8.06%* 7.37% 6.77% 5.67% 6.88% 6.52%
Ratio of Expenses to Average Net Assets(C) 1.94% 1.36% 0.89% 0.42% 0.27% 0.24% 0.21% 0.21%
Ratio of Net Investment Income to
Average Net Assets(C) 6.67% 7.56% 7.68% 7.37% 6.77% 5.67% 6.88% 6.52%
Portfolio turnover rate 234.20% 203.83% 411.24% 252.89% 266.03% 331.63% 279.42% 283.13%
- ---------------------------
</TABLE>
*Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A)Commencement date for the Full Maturity Fixed Income Portfolio was October
20, 1988.
(B)Total Return on Net Asset Value is net of the management fee of 0.50% per
annum.
(C)Ratios include all management fees and expenses.
- --------------------------------------------------------------------------------
53
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
LIMITED MATURITY FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
-------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.07 $9.98 $10.11 $10.48 $10.52 $10.09 $10.22
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.43* 0.77* 0.74* 0.64 0.49 0.49 0.62 0.62
Net realized and unrealized gain (loss)
on investments and futures 0.07 (0.09) 0.13 0.45 0.12 (0.32) 0.13 (0.10)
-------- -------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 0.50 0.68 0.87 1.09 0.61 0.17 0.75 0.52
LESS DISTRIBUTIONS:
Net investment income (0.43) (0.77) (0.74) (0.64) (0.49) (0.49) (0.62) (0.62)
Net realized capital gains (0.00) (0.00) (0.00) (0.08) (0.08) (0.11) (0.00) (0.00)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions (0.43) (0.77) (0.74) (0.72) (0.57) (0.60) (0.62) (0.62)
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.07 $ 9.98 $ 10.11 $ 10.48 $ 10.52 $ 10.09 $ 10.22 $ 10.12
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN ON NET ASSET VALUE(B) 5.01% 6.52% 8.49% 10.46% 5.49% 1.14% 7.19% 4.66%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands) $6,284 $18,522 $30,151 $101,881 $162,694 $189,542 $186,856 $201,196
Ratio of Expenses to Average Net Assets 0.50%* 0.50%* 0.50%* 0.29% 0.17% 0.14% 0.12% 0.10%
Ratio of Net Investment Income to
Average Net Assets 8.49%* 8.04%* 7.49%* 6.02% 4.66% 4.73% 6.17% 6.03%
Ratio of Expenses to Average Net Assets(C) 1.97% 0.88% 0.55% 0.29% 0.17% 0.14% 0.12% 0.10%
Ratio of Net Investment Income to
Average Net Assets(C) 7.01% 7.66% 7.45% 6.02% 4.66% 4.73% 6.17% 6.03%
Portfolio turnover rate 0.00% 137.50% 279.16% 99.86% 167.38% 178.01% 155.12% 132.75%
- ------------------------------
</TABLE>
*Reflects he waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A)Commencement date for the Limited Maturity Fixed Income Portfolio was
December 22, 1988.
(B)Total Return on Net Asset Value is net of the management fee of 0.50% per
annum.
(C)Ratios include all management fees and expenses.
- --------------------------------------------------------------------------------
54
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
DIVERSIFIED EQUITY PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
--------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $11.16 $11.42 $11.47 $12.95 $13.95 $13.90 $14.76
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.35* 0.43* 0.35* 0.31* 0.25* 0.26 0.29 0.35
Net realized and unrealized gain
on investments 1.12 0.52 0.08 1.52 1.70 0.45 2.34 3.57
-------- -------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 1.47 0.95 0.43 1.83 1.95 0.71 2.63 3.92
LESS DISTRIBUTIONS:
Net investment income (0.31) (0.44) (0.34) (0.31) (0.25) (0.26) (0.29) (0.35)
Net realized capital gains (0.00) (0.25) (0.04) (0.04) (0.70) (0.50) (1.48) (0.74)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions (0.31) (0.69) (0.38) (0.35) (0.95) (0.76) (1.77) (1.09)
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.16 $ 11.42 $ 11.47 $ 12.95 $ 13.95 $ 13.90 $ 14.76 $ 17.59
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN ON NET ASSET VALUE(B) 14.45% 7.76% 3.24% 15.14% 14.47% 4.21% 20.11% 26.42%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands) $3,556 $7,920 $10,725 $13,878 $21,087 $22,547 $39,634 $54,435
Ratio of Expenses to Average Net Assets 0.50%* 0.50%* 0.50%* 0.50%* 0.50%* 0.40% 0.31% 0.18%
Ratio of Net Investment Income to
Average Net Assets 4.88%* 4.45%* 3.37%* 2.13%* 1.90%* 1.83% 2.30% 2.09%
Ratio of Expenses to Average Net Assets(C) 2.68% 1.33% 1.08% 0.66% 0.53% 0.40% 0.31% 0.18%
Ratio of Net Investment Income to
Average Net Assets(C) 2.70% 3.61% 2.80% 1.97% 1.87% 1.83% 2.30% 2.09%
Portfolio turnover rate 29.99% 33.57% 72.49% 65.89% 45.87% 100.45% 68.12% 57.76%
- ------------------------------------
</TABLE>
*Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A)Commencement date for the Diversified Equity Portfolio was October 20, 1988.
(B)Total Return on Net Asset Value is net of the management fee of 0.75% per
annum.
(C)Ratios include all management fees and expenses.
- --------------------------------------------------------------------------------
55
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
-------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.68 $10.69 $10.87 $12.03 $12.76 $11.66 $12.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.39* 0.56* 0.54* 0.44 0.44 0.42 0.32 0.41
Net realized and unrealized gain (loss)
on investments and futures 0.64 0.11 0.21 1.16 1.18 (0.26) 1.44 1.98
-------- -------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 1.03 0.67 0.75 1.60 1.62 0.16 1.76 2.39
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income (0.35) (0.56) (0.57) (0.44) (0.44) (0.42) (0.32) (0.41)
Net realized capital gains (0.00) (0.10) (0.00) (0.00) (0.45) (0.84) (0.47) (1.23)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions (0.35) (0.66) (0.57) (0.44) (0.89) (1.26) (0.79) (1.64)
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.68 $ 10.69 $ 10.87 $ 12.03 $ 12.76 $ 11.66 $ 12.63 $ 13.38
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN ON NET ASSET VALUE(B) 9.96% 5.34% 6.62% 13.99% 13.02% 0.29% 14.97% 19.20%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands) $13,545 $34,565 $33,547 $34,853 $41,313 $46,523 $46,646 $43,130
Ratio of Expenses to Average Net Assets 0.50%* 0.50%* 0.50%* 0.38% 0.31% 0.26% 0.21% 0.23%
Ratio of Net Investment Income to
Average Net Assets 6.06%* 6.12%* 4.92%* 3.73% 3.51% 3.39% 4.12% 3.08%
Ratio of Expenses to Average Net Assets(C) 1.27% 0.52% 0.52% 0.38% 0.31% 0.26% 0.21% 0.23%
Ratio of Net Investment Income to
Average Net Assets(C) 5.29% 6.11% 4.89% 3.73% 3.51% 3.39% 4.12% 3.08%
Portfolio turnover rate 106.23% 132.60% 201.36% 201.93% 132.14% 208.31% 160.41% 146.69%
- -------------------------------------------
</TABLE>
* Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A)Commencement date for the Balanced Portfolio was October 20, 1988.
(B)Total Return on Net Asset Value is net of the management fee of 0.75% per
annum.
(C)Ratios include all management fees and expenses.
- -------------------------------------------------------------------------------
56
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
AHA Investment Funds, Inc.-
Full Maturity Fixed Income Portfolio
Limited Maturity Fixed Income Portfolio
Diversified Equity Portfolio
Balanced Portfolio:
We have audited the accompanying statements of assets and liabilities of AHA
INVESTMENT FUNDS, INC. (a Maryland corporation, comprising the Full Maturity
Fixed Income Portfolio, Limited Maturity Fixed Income Portfolio, Diversified
Equity Portfolio and Balanced Portfolio), including the portfolios of
investments, as of June 30, 1996, and the related statements of operations,
statements of changes in net assets and financial highlights for the periods
indicated thereon. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
June 30, 1996, by correspondence with the custodian and brokers. As to
securities purchased but not received, we requested confirmation from brokers
and, when replies were not received, we carried out other alternative auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the AHA Investment Funds, Inc. as of
June 30, 1996, and the results of their operations, the changes in their net
assets and financial highlights for the periods indicated thereon, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
August 7, 1996
57
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For each of the investment managers of AHA Investment Funds, Inc., a performance
discussion is provided on its segment of the Portfolio. Each of the investment
managers' discussions includes an analysis of investment performance during the
fiscal year ended June 30, 1996 and a description of the principal factors,
including market conditions, investment strategies and techniques that affected
performance. Past performance is not predictive of future performance.
Also included are graphs comparing the performance of the Portfolios to the
performance of broad based securities market indices. These graphs show the
growth of $100,000.00 invested in each Portfolio and the growth of the same
amount invested in a comparable index since inception of the Portfolio through
June 30, 1996. The graph of each of the Portfolios is shown, net of all fees and
expenses. These fees include the program services fee of the AHA Program. The
graphs assume the reinvestment of all dividends/interest for both the Portfolios
and indices. Listed below is additional information related to the Portfolios.
Full Maturity Fixed Income Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STARTING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- -------------------------------- -------- ----------
Neuberger & Berman 07/01/95 50%
Western Asset Management Company 07/01/95 50%
- --------------------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STARTING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- -------------------------------- -------- ----------
The Patterson Capital Corporation 12/22/88 40%
Neuberger & Berman 12/07/92 60%
- --------------------------------------------------------------------------------
Diversified Equity Portfolio
- --------------------------------------------------------------------------------
STARTING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- -------------------------------- -------- ----------
Cambiar Investors, Inc. 10/20/88 50%
Investment Research Company 12/01/93 50%
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STARTING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- -------------------------------- -------- ----------
Avatar Investors Associates Corporation 10/20/88 20%
Cambiar Investors, Inc. 12/01/93 50%
Western Asset Management Company 07/01/95 30%
- --------------------------------------------------------------------------------
58
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
FULL MATURITY FIXED INCOME PORTFOLIO
WESTERN ASSET MANAGEMENT COMPANY (MANAGES 50% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Full
Maturity Fixed Income Portfolio, net of all fees and expenses, was 3.58%,
compared to the Lehman Brothers Aggregate Bond Index (LB Aggregate Index), which
had a total return of 5.01% for the same period. The gross return of the segment
of the Portfolio managed by Western Asset Management Company ("WAMCO") was
4.87%. The principal factors which affected performance during the fiscal year
are discussed below.
The 12-month period ending June 30, 1996 was characterized by abnormally high
volatility in the fixed income markets, which in turn was driven by dramatic
changes in investors' expectations for economic growth. Interest rates fell
during the latter half of 1996, only to soar in the first half of 1996. By
pursuing a variety of strategies and avoiding excessive interest rate risk,
WAMCO was able to deliver mean market returns in a hostile environment.
Performance was negatively impacted by the fact that the Portfolio held a long
duration posture throughout the period and interest rates rose on balance, after
seesawing dramatically. However, the negative impact of rising interest rates in
1996 was offset substantially by the success of the Portfolio's yield curve
strategy. In addition, WAMCO's decision to shift from an underweighted mortgage
sector exposure to an overweight exposure in early 1996 also contributed to
returns.
The reason for holding a long duration Portfolio was that WAMCO felt that
interest rates were generally attractive relative to current and expected
inflation. This view was based on a variety of indicators, which suggested that
monetary policy was relatively tight and inflation pressures were unlikely to
pick up significantly. Chief among these indicators were historically slow rates
of growth in the U.S. money supply, relatively stable commodity prices, a
strengthening dollar, global competitive pressures, and reasonably wide spread
between short-term interest rates and inflation. Consistent with WAMCO's desire
to avoid excessive risk, the Portfolio's duration ranged from 110% to 120% of
its benchmark duration.
The Portfolio held a barbell exposure to maturities throughout the period, in
anticipation of a flattening of the yield curve. Particular emphasis was placed
at the beginning of year on the long end of the yield curve, where spreads
between 10- and 30-year bonds were fairly wide. By hedging the duration exposure
of long maturity bonds and zero coupon issues held in the Portfolio with 10-year
Note futures, the Portfolio was able to target its yield curve exposure to this
sector of the yield curve. This strategy was rewarded by a noticeable flattening
of the yield curve, particularly in the second quarter of 1996, as short- and
intermediate-term interest rates rose more than long-term rates. This caused the
10- to 30-year spread to narrow to 15 basis points by the end of the second
quarter. At this point, WAMCO decided to shift yield curve exposure to the
intermediate sector of the yield curve by selling long maturity and zero coupon
issues and purchasing 5- and 10-year issues.
59
<PAGE>
In view of the heightened risk of prepayments as interest rates fell in 1995,
and the relatively narrow yield spreads offered by mortgage-backed issues in
compensation for this risk, the Portfolio was underweighted mortgages throughout
the second half of the year. This proved quite beneficial, since the sector's
performance generally lagged. Mortgage exposure shifted to overweighted early in
1996 to take advantage of rising and historically wide spreads, and mortgages
subsequently turned in superior performance.
Corporate exposure was overweighted for most of the period, adding to returns as
corporate spreads narrowed somewhat. Corporate exposure was concentrated
throughout the period in bonds at the lower end of the investment quality scale.
This contributed somewhat to performance, since moderate economic growth helped
quality spreads generally to narrow, thus favoring this sector of the corporate
market. Despite the good performance of the sector, WAMCO gradually reduced
corporate exposure over the course of the year, in recognition of a) the fact
that spreads have fallen to historically narrow levels, and b) WAMCO's outlook
for economic growth was less optimistic than that held by the market.
60
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
FULL MATURITY FIXED INCOME PORTFOLIO
NEUBERGER & BERMAN (MANAGES 50% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Full
Maturity Fixed Income Portfolio, net of all fees and expenses, was 3.58%
compared to the Lehman Brothers Aggregate Bond Index (LB Aggregate Index) which
had a total return of 5.01% for the same period. The gross return of the segment
of the Portfolio, managed by Neuberger & Berman ("Neuberger") was 4.55%. The
principal factors which affected performance during the fiscal year are
discussed below.
"It was the best of times; it was the worst of times," wrote Charles Dickens in
A TALE OF TWO CITIES. Had he written that book today, he probably would have
been referring to the fixed income market over the past year. The last six
months of 1995 were "the best of times," and the first six months of 1996 were
"the worst of times!" Interest rates declined by more than half of a percentage
point across most treasury maturities during the second half of 1995. Credit
spreads on corporate and asset-backed securities narrowed while mortgage bonds
fell out of favor, underperforming most other sectors of the bond market. Total
returns for most sectors of the bond market were very strong in the second half
of 1995 following a very strong first half of the year. All of this positive
performance came as the result of what appeared to be a substantial weakening of
the economy during 1995 that prompted the Federal Reserve to lower short-term
interest rates by half of a percentage point during the last six months of the
year.
As we entered 1996, the economy seemed to revive from its 1995 coma as consumer
demand fueled a strong rebound in real economic growth. The strong performance
of the economy induced a comparable negative reaction in the bond market.
Soaring commodity prices and strong employment gains spawned new inflation
fears. Adding to the strong economy and incipient inflation concerns was the
collapse of balanced budget negotiations. This reversed the positive market
sentiment generated by expectations that long-term interest rates would decline
as chronic government deficit spending disappeared. The net result was a swift
and dramatic rise in interest rates across all Treasury maturities during the
first half of 1996. Yields on one-year through thirty-year treasury securities
increased between one-half to a full percentage point from their 1995 year-end
levels. Credit spreads on corporate and asset-backed securities continued to
narrow as a strong economy contributed to improving overall credit quality. The
previously lagging mortgage market reignited in the new, higher interest rate
environment of 1996, as expectations of slower prepayments combined with
mortgage bonds' higher yields to make this sector once again the favorite of
total return investors.
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The second half of 1995 saw strong performance in Neuberger's Portfolio. Our
strategy of targeting a relatively long duration and correspondingly higher
interest rate sensitivity for the fund was very successful as interest rates
declined substantially over this period of time. Consistent with this strategy,
Neuberger reduced the Portfolio's investment in mortgage securities on concerns
that lower interest rates would produce higher prepayments that would, in turn,
lower the return on mortgage bonds. Neuberger also increased the Portfolio's
investment in corporate and asset-backed securities on expectations that
improving credit quality would translate into higher relative returns. These
three strategies; longer duration, lower mortgage bond exposure, and a higher
commitment to corporate and asset-backed securities-all contributed positively
to the Portfolio's performance in the second half of 1995.
As we entered 1996, Neuberger maintained the Portfolio's relatively long
duration and high interest rate sensitivity on expectations that the Federal
Reserve would lower short-term interest rates once again on concerns over a
weakening economy. Portfolios continued to target a high exposure to mortgage
bonds, based on the view that they had become significantly undervalued due to
the market building in overly aggressive prepayment estimates. The Federal
Reserve did lower short-term interest rates one more time as we expected, but a
suddenly revived economy, soaring commodity prices, and the collapse of balanced
budget negotiations, killed the bond market rally half way through February.
Within two weeks, interest rates increased by about half of what their eventual
total increase would be for the first six months of 1996. The sell-off was swift
and painful.
The Portfolio's relatively long duration and high interest rate sensitivity
negatively affected performance and was the primary reason for the Portfolio's
negative total return for the first six months of 1996. As interest rates
continued to rise, Neuberger moved quickly and decisively to lower the
Portfolio's interest rate sensitivity by reducing overall duration. This change
in strategy successfully mitigated the potential negative impact on the
Portfolio of subsequent dramatic increases in interest rates. Neuberger
increased the Portfolio's commitment to the mortgage sector as prepayment fears
subsided and mortgage bonds' higher yields attracted investors who had been
invested in long-term treasury notes and bonds. Neuberger's strategy of
obtaining incremental yield for the Portfolio by investing heavily in corporate,
asset-backed, and mortgage securities contributed substantial value to the
Portfolio during the first six months of 1996, and helped offset the negative
impact of the Portfolio's longer duration and relatively high interest rate
sensitivity at the start of the year. Our timely adjustment to the Portfolio's
duration minimized the potential negative impact of subsequent increases in
interest rates on the Portfolio's total return.
While Neuberger was able to deliver "the best of times" in terms of performance
for the Portfolio in the last six months of 1995, they were not able to
completely escape the "worst of times" in the first six months of 1996. However,
Neuberger managed to avoid a large part of the pain in the bond market over the
first half of 1996 in an effort to protect the Shareholders' investments while
maximizing their long-term total returns.
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COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE FULL MATURITY
FIXED INCOME PORTFOLIO AND THE LEHMAN BROTHERS AGGREGATE BOND INDEX FOR
THE YEARS ENDED JUNE 30,
Average Annual Total Return
1 Year 3.58%
Since Inception 7.68%
AHA FULL MATURITY PORTFOLIO
Full Maturity LB Aggregate
Qtr Value Value
- --- ----- -----
1988 $100,000 $100,000
1989 $108,602 $110,010
1990 $113,624 $118,641
1991 $122,561 $131,321
1992 $139,302 $149,778
1993 $155,986 $167,442
1994 $153,756 $165,249
1995 $170,647 $185,987
1996 $176,763 $195,313
[GRAPH]
INCEPTION DATE FOR THE FULL MATURITY FIXED INCOME PORTFOLIO WAS OCTOBER 20,
1988.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
LIMITED MATURITY FIXED INCOME PORTFOLIO
THE PATTERSON CAPITAL CORPORATION (MANAGES 40% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Limited
Maturity Fixed Income Portfolio, net of all fees and expenses, was 4.66%,
compared to 90-Day U.S. Treasury Bills, which had a total return of 5.16% and
the Lehman Brothers 1-3 Year Government Bond Index, which had a total return of
5.48% for the same period. The gross return of the segment of the Portfolio,
managed by The Patterson Capital Corporation ("Patterson") was 5.58%. The
principal factors which affected performance during the fiscal year are
discussed below.
Though the recent twelve month period has proved quite treacherous for many bond
investors, the Portfolio managed by Patterson Capital has posted positive
returns in excess of its benchmark for the fiscal year ending June 30, 1996. To
put these returns into perspective, let's look at the market environment over
the last year:
The second half of 1995 was a strong bull market in bonds, with positive returns
posting for all maturities. The market continued to rally into February of 1996.
At that time, with speculation of a recession looming over the markets, the
Federal Reserve, for the third time since July of 1995, lowered the funds rate
from 5.50% to 5.25%. The majority of market participation took this last move as
an opportunity to increase the maturity risk of their Portfolios, thereby
placing a bet that rates would decline further.
Despite these developments, we did not take any maturity risk. Typically, in a
positively sloped yield environment, longer maturities will yield more than
shorter maturities. Noting in mid-February that the 2-year Treasury was yielding
only 4.81%, nearly 50 basis points less than Fed Funds at 5.25%, we believed
that a back-up in rates was inevitable. As we now know, the 2-year moved from a
low yield of 4.81% on February 13, 1996, to a 6.11% yield on June 30, 1996-a
back-up of 130 basis points. A confluence of other factors had begun to weigh
heavily on the fixed income markets by late in the first quarter. Chief among
these factors, was the prospect that the Federal Reserve would need to reverse
course and actually raise interest rates to prevent any future rise in
inflation. The markets looked to the improving employment condition as the
reason the Federal Reserve might choose to raise rates.
Consequently, with the prospect of rising rates on the horizon, the fixed income
markets performed as badly in the first half of 1996 as they did well in the
last half of 1995. For example, the 30-year Treasury bond posted a 9.57% return
through June 30, 1996, while the 2-year Treasury note posted a positive return
of +1.12%. As is evident, longer maturities have underperformed year-to-date
and, in fact, all maturities greater than 3-years have posted negative returns
year-to-date.
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Rather than position the Portfolio to take advantage of any interest rate
forecast, which, if wrong, would have proved disastrous, we chose instead to
enhance return by adding yield product to the Portfolio and keeping the
Portfolio's coupon income high. Over the last year we have maintained
approximately a 40% position in a combination of corporates, Government agencies
and asset-backed securities. These securities trade at a yield advantage to
treasuries and have consistently outperformed treasuries over the last year.
Secondly, the Portfolio has maintained a consistent coupon income advantage to
the benchmark which has also benefitted overall Portfolio return. All of these
strategies were employed with the use of investment grade securities, thereby
keeping the overall quality of the Portfolio extremely high (AAA-). Again, our
decision not to take any unwarranted maturity risk in 1996 most directly
contributed to the positive performance of the fund.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
LIMITED MATURITY FIXED INCOME PORTFOLIO
NEUBERGER & BERMAN (MANAGES 60% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Limited
Maturity Fixed Income Portfolio, net of all fees and expenses, was 4.66%,
compared to the 90-Day U.S. Treasury Bills, which had a total return of 5.16%
and the Lehman Brothers 1-3 Year Government Bond Index which had a total return
of 5.48% for the same period. The gross return of the segment of the Portfolio,
managed by Neuberger & Berman ("Neuberger"), was 5.13%. The principal factors
which affected performance during the fiscal year are discussed below.
"It was the best of times; it was the worst of times," wrote Charles Dickens in
A TALE OF TWO CITIES. Had he written that book today, he probably would have
been referring to the fixed income market over the past year. The last six
months of 1995 were "the best of times" and the first six months of 1996 were
"the worst of times!" Interest rates declined by more than half of a percentage
point across most treasury maturities during the second half of 1995. Credit
spreads on corporate and asset-backed securities narrowed while mortgage bonds
fell out of favor, underperforming most other sectors of the bond market. Total
returns for most sectors of the bond market were very strong in the second half
of 1995 following a tremendous first half of the year. All of this positive
performance came as the result of what appeared to be a substantial weakening of
the economy during 1995 that prompted the Federal Reserve to lower short-term
interest rates by half of a percentage point during the last six months of the
year.
As we entered 1996, the economy seemed to revive from its 1995 coma as consumer
demand fueled a strong rebound in real economic growth. The strong performance
of the economy induced a comparable negative reaction in the bond market.
Soaring commodity prices and strong employment gains spawned new inflation
fears. Adding to the strong economy and incipient inflation concerns was the
collapse of balanced budget negotiations. This reversed the positive market
sentiment generated by expectations that long-term interest rates would decline
as chronic government deficit spending disappeared. The net result was a swift
and dramatic rise in interest rates across all Treasury maturities during the
first half of 1996. Yields on one-year through thirty-year treasury securities
increased between one-half to a full percentage point from their 1995 year-end
levels. Credit spreads on corporate and asset-backed securities continued to
narrow as a strong economy contributed to improving overall credit quality. The
previously lagging mortgage market reignited in the new, higher interest rate
environment of 1996, as expectations of slower prepayments combined with
mortgage bonds' higher yields to make this sector once again the favorite of
total return investors.
The bond market ended the fiscal year 1996 with slightly higher yields than
opening levels. Short to intermediate yields finished approximately 20 to 40
basis points higher. However, this moderate overall change masks the significant
volatility that took place during the year. The first half of the fiscal year
was marked by a rallying bond market that drove yields down by 40 to 60 basis
points. This positive trend reversed suddenly in February of 1996. Interest
rates rose dramatically across the yield curve as U.S. economic growth rebounded
rekindling fears of future inflationary pressures. Rates on treasury securities
with maturities of 2 through 30 years rose approximately 1.0% resulting in
negative total returns for
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any bonds longer than 3 years during the second half of the fiscal year. The
bulk of the rate backup occurred during a 2.5 week period beginning in mid
February. The sell off was initially triggered by Fed Chairman Alan Greenspan's
comments that economic growth was probably stronger than the market was
anticipating. The subsequent Labor Department report that over 700,000 new jobs
were created in February confirmed the market's fears and drove yields higher.
The Portfolio's return was impacted most heavily by the back up in rates,
despite the fact that we shortened the Portfolio's duration during the first
quarter. The positions in corporates, asset-backeds and mortgages outperformed
treasuries and offset some of the negative impact of the market downturn.
Neuberger lowered duration from 3.0 to 2.5 years during February, and shortened
again to 2.25 years before the end of the first quarter. Neuberger ended the
fiscal year at about a 2.1 year duration. These moves were made in response to
our view that the positive market environment that prevailed in 1995 had come to
an end. As noted above, the economy made a dramatic reversal from its dead in
the water 4th quarter 1994 performance. Our view is that while it is yet to be
seen if inflation will reignite, the market will continue to push rates higher
until growth slows and some slack in both labor and industrial capacity is
created. Therefore we ended the fiscal year with a cautious duration position.
Neuberger maintained a significant position in the corporate sector. While the
corporate market as a whole remains relatively expensive, we are still able to
find individual bonds that offer good relative value. These attractive names
have tended to be in the finance sector as rising rates made investors wary of
financial firms in general. Neuberger purchased bonds of leading firms that will
do well over the course of an interest rate cycle at very attractive yield
premiums. Neuberger also maintained a relatively heavy 15% weighting in asset-
backed securities which provide incremental yield and AAA credit quality.
Neuberger have closely followed the rise in consumer delinquencies on the
collateral backing these bonds and remain convinced that the AAA ratings are
appropriate and credit risk on these securities is extremely low.
Our mortgage position at year-end was 5% of the Portfolio. This relatively low
allocation was a result of our view that market volatility would increase in the
second half and negatively impact mortgages. In hindsight, volatility was not
higher than market expectations resulting in good performance for mortgages
versus treasuries.
To summarize our strategy in response to the February market reversal, we
lowered interest rate risk and maximized yield by maintaining significant
exposure to corporates and asset-backeds. Neuberger believes the U.S. economy is
in excellent shape and corporate credit quality will remain at a relatively high
level supporting corporate bond values. Neuberger believes that interest rates
could continue to rise over the near term in response to a cyclical upturn in
inflation. However, the long-term secular disinflationary trend remains intact
and over the intermediate-term bonds should once again provide income and total
return solidly above inflation.
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COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE LIMITED MATURITY
FIXED INCOME PORTFOLIO, 90-DAY T-BILLS AND LEHMAN BROTHERS 1-3 YEAR
GOVERNMENT BOND INDEX FOR THE YEARS ENDED JUNE 30,
Average Annual Total Return
1 Year 4.66%
Since Inception 6.48%
AHA LIMITED MATURITY PORTFOLIO
Limited Maturity 90-Day T-Bills LB Gov't 1-3 Year
Qtr Value Value Value
- --- ----- ----- -----
1988 $100,000 $100,000 $100,000
1989 $105,014 $104,515 $106,346
1990 $111,860 $112,875 $115,243
1991 $121,362 $120,518 $127,050
1992 $134,059 $125,978 $140,173
1993 $141,425 $129,889 $149,344
1994 $143,031 $134,334 $151,614
1995 $153,312 $141,602 $163,238
1996 $160,454 $148,911 $172,183
[GRAPH]
INCEPTION DATE FOR THE LIMITED MATURITY FIXED INCOME PORTFOLIO WAS DECEMBER
22, 1988.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
DIVERSIFIED EQUITY PORTFOLIO
INVESTMENT RESEARCH COMPANY (MANAGES 50% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Diversified
Equity Portfolio, net of all fees and expenses, was 26.42%, compared to the S&P
500 Stock Index, which had a total return of 26.08%. for the same period. The
gross return of the segment of the Portfolio, managed by Investment Research
Company ("IRC"), was 28.36% The principal factors which affected the performance
during the fiscal year are discussed below.
IRC's excess performance relative to the S&P 500 is due primarily to two
factors: specific stock selection and the positive influence of IRC's price
momentum model integrated into the firm's quantitative models. IRC utilizes the
Barra performance analysis tools to provide an in-depth analysis of the firm's
Portfolio performance. Each of the two factors indicated above are further
elaborated below:
SPECIFIC STOCK SELECTION
About two-thirds of the excess performance is attributable to specific stocks
held in IRC's Portfolio. In managing the Portfolio, IRC will proportionately
allocate invested assets to each industry sector consistent with each sector's
weight in the S&P 500 Index. The firm then attempts to select specific stocks
within each industry sector that its quantitative models have identified are
likely to outperform. On average, the firm will invest in about eight stocks for
each industry sector. During the fiscal year ending June 30, 1996, the firm's
quantitative models were able to successfully identify the best performing
assets within each industry sector.
PRICE MOMENTUM
IRC has integrated into its investment selection models an element that focuses
on historical performance of each stock in the S&P 500 Index. The firm's
historical testing and actual performance record has provided it with clear
evidence that stocks with positive price momentum over the nine-month trailing
period are more likely to outperform prospectively. As a result, price momentum
represents a common element in all stocks selected by IRC's mode. During the
year ending June 30, stocks exposed to recent positive momentum trends
outperformed stocks which did not have the positive momentum exposure. This
accounted for about a third of the excess performance.
Two other common factors that also influenced returns were the Portfolio's
exposure to stocks that derive a significant portion of their income from
domestic sources (as opposed to foreign sources) and stocks that exhibit
volatile price movement. Both of these factors are a random outcome of IRC's
investment process. However, the Portfolio's exposure to stocks with a
relatively low foreign income component helped performance but was almost
exactly offset by its exposure to stocks exhibiting a relatively high level of
market volatility (note; market volatility as defined by Barra is after the
impact of the stock's Beta has been factored out).
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In particular, positive company specific events helped improve performance for
several stocks in the Portfolio. Loral Corporation was acquired by Lockheed
Corporation at a substantial premium relative to its market value prior to the
acquisition. The Portfolio held both Chemical Bank and Chase Manhattan Bank
which both advanced as investors expressed enthusiasm for the synergies expected
from the merger of the two banking giants. Sun Microsystems benefitted from
strong demand for its new enterprise server system as well as market mania for
stocks associated with the Internet. Sun developed the program language Java
which has been widely adopted as the industry standard for developing applets
for internet browsers. Campbell Soup represented a significant position in the
Portfolio and benefitted from product expansion and cold winter weather which
boosted soup sales. Sears, Roebuck continued on its road to improving its appeal
to the retail shopping customer and has seen improved profitability as a
results. Finally, the Portfolio benefitted by selling a significant portion of
its holdings in Micron Technology prior to its collapse from $94 to about $20
per share.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
DIVERSIFIED EQUITY PORTFOLIO
CAMBIAR INVESTORS, INC. (MANAGES 50% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Diversified
Equity Portfolio, net of all fees and expenses, was 26.42%, compared to the S&P
500 Stock Index, which had a total return of 26.08% for the same period. The
gross return for the segment of the Portfolio, managed by Cambiar Investors,
Inc. ("Cambiar") was 27.11%. The principal factors which affected performance
during the fiscal year of are discussed below.
Cambiar's Portfolios are constructed company-by-company rather than investing by
industry/sector selection or asset allocation. Cambiar screens for attractively
valued stocks based on the following characteristics: low relative
price/earnings, price/book, price/sales, and price/cash flow ratios. The result
is a group of stocks trading at the lower half of their historic range, both
versus themselves and their peer group. Cambiar investment analysts following
specific industries evaluate the stocks, looking for internal improvements or
strategic developments which will trigger, in our opinion, above average price
appreciation. The Portfolios are not restricted by capitalization, although they
generally fall into the medium to large capitalization range. Portfolios tend to
hold 30 to 40 stocks.
Cambiar attempts to minimize risk by purchasing stocks at the lower end of their
relative valuation range. We also use a multifaceted sell discipline. Stocks
become candidates for sale if price appreciation results in overweighting or a
target price based on relative valuation has been reached. In addition, if the
positive developments we were looking for fail to develop, and we see no
potential improvement on the near horizon, the stock will be sold.
During the 1996 fiscal year, the overall market increased in the face of
opposing economic pictures and meteoric rises and falls in some individual
securities. Prior to the beginning of the fiscal year, the stock market had been
driven by twin catalysts of earnings improvement and declining interest rates.
In the latter half of 1995, economic pundits became concerned about a slowing
economy. Potential shortfalls or reductions in corporate earnings growth came to
the forefront on investor concern. Inflation appeared muted and the interest
rate catalyst appeared intact as Federal Reserve easing continued through
December 1995. During the first part of 1996, however, investment concerns
abruptly shifted. Strong employment reports and increasing commodity prices
fueled inflation concerns and interest rates as measured by the 30-year treasury
bond reversed direction increasing from 5.95% at the beginning of January 1996
to 6.89% at June 30, 1996. Contrary to earlier prognostications, good news for
this period proved to be corporate earnings reports which generally continued to
meet or exceed expectations.
Cambiar's stock specific investment management process worked well in this
uncertain period. The best opportunities tended to be companies which had
previously announced some disappointment to the investment community. In these
cases, Cambiar sees opportunity when light is visible at the end of the tunnel
and not recognized in the share price. Two of the Portfolio positions, Vans,
Inc. and Harley-Davidson, Inc., exemplified these circumstances. Vans, a casual
shoe manufacturer in California had experienced a shortfall in sales of its
traditional product line, causing an excess inventory position and bloated cost
structure due to
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unused manufacturing capacity. Late in 1994, the Company announced a
restructuring of operations. In addition, the Company was producing a new
product, a "hot" new snowboarding boot, which was impacting revenue growth
positively. The stock price appreciated as the positive developments were
recognized. The Vans position achieved its valuation target and was sold during
the fiscal year. The share price increased 192.5% from June 30, 1995 through
liquidation in the Portfolio.
Harley Davidson was another example where potential earnings disappointment
created opportunity for Cambiar. The Harley name brand has become so popular
that in late 1994 and 1995, the Company was experiencing production problems in
meeting demand. In addition, the Harley stock price anticipated weak consumer
spending in the Fall of 1995, which caused a slight shortfall in earnings
generated by sale of Harley retail products (jackets, gloves, T-shirts,
insignia). As production bottlenecks were cleared and retail product sales
picked up, earnings began to improve along with the share price. The Harley-
Davidson position appreciated 73.2% from June 30, 1995 until the position was
liquidated for valuation purposes recently.
Other positions which performed nicely during the fiscal year were Pharmacia
Upjohn. Student Loan Marketing Association (Sallie Mae), Wallace Computer
Systems, General Electric and Dupont. Generally, the valuation of these
securities as the investment community recognized improvement in the fundamental
condition of the company or, in two cases, as the companies were involved in, or
targeted for, potential merger activity.
The Portfolio also suffered some disappointments, although outperformers
significantly outweighted laggards. The Portfolio has not had a large weighting
in technology stocks, but the poorest performers came from the few names held in
technology. National Semiconductor and Tandem have been disappointing holdings
even though Cambiar felt that the stocks were attractively valued relative to
similar companies and the market, when the positions were purchased. Generally,
earnings have not met expectations. For the fiscal year, Bandag and Asia Pulp
and Paper also performed poorly although in the most recent months Asia Pulp and
Paper has made a strong comeback.
Going forward into fiscal 1997. Cambiar intends to use the same, time-proven
stock selection methodology used in years past. We believe our bottoms-up stock
selection process works well in various market conditions over longer periods of
time. We anticipate no change in investment strategy or style, and focus our
efforts on continuing to provide superior results going forward.
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COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE DIVERSIFIED EQUITY
PORTFOLIO AND THE S&P 500 STOCK INDEX FOR THE YEARS ENDED JUNE 30,
Average Annual Total Return
1 Year 26.42%
Since Inception 13.53%
AHA DIVERSIFIED EQUTIY PORTFOLIO
Diversified S&P 500
Qtr Value Return
- --- ----- ------
1988 $100,000 $100,000
1989 $114,455 $117,967
1990 $123,340 $137,325
1991 $127,334 $147,445
1992 $146,610 $167,384
1993 $167,830 $190,174
1994 $174,894 $192,732
1995 $210,071 $242,974
1996 $265,563 $306,332
[GRAPH]
INCEPTION DATE FOR THE DIVERSIFIED EQUITY PORTFOLIO WAS OCTOBER 20, 1988.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
BALANCED PORTFOLIO
AVATAR INVESTORS ASSOCIATES CORP. (MANAGES 20% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Balanced
Portfolio, net of all fees and expenses, was 19.20%, compared to a total return
for the same period of 15.55% for a mix of 50% Lehman Brothers Aggregate Bond
Index and 50% S&P 500 Stock Index. The gross return of the segment of the
Portfolio, managed by Avatar Investors Associates Corp. ("Avatar") was 23.42%
compared to S&P 500 Stock Index which had a total return of 26.08% for the same
period. The principal factors which affected performance during the fiscal year
are discussed below.
Avatar's objectives are to participate with rising markets to product reasonable
gains and to get more defensive by building cash reserves during high risk
periods. Risk in the market is assessed using a quantitative model that measures
money flows in the economy as well as those in the hands of investors. When
Liquidity expands faster than can be absorbed by the demands of the economy,
much of this excess money makes its way into financial assets. Conversely,
contracting Liquidity draws money from financial assets to meet economic
demands, raising investment risk. Avatar's Liquidity Model includes 60
indicators relating to interest rate trends, economic conditions, investor money
flows, investor sentiment, market valuation and market technical conditions and
is updated daily to give an asset allocation exposure corresponding to the
current risk level of the market.
Avatar began the fiscal year at 70% invested. As the interest rate environment
improved, lower risk conditions were being reflected in their Liquidity Model
and they gradually raised exposure to a high of 90% invested in equities by
December. By the beginning of March however, there were increasing signs, such
as strong jobs reports that the economy was firming. The result was that the
long bond came under intense selling pressure. Since the trend in long-term
interest rates is a key component of the Economic Liquidity Model, the Model
deteriorated sufficiently to cause them to go down to 75% equity by the end of
March. In May many speculative excesses became evident, causing measures of
sentiment dropped into negative territory and model's momentum measurements
deteriorate further and they cut back to a 68% invested exposure, where they
ended the period. For the year, they average 79% invested, higher than the 63%
average for the firm's history. Asset allocation produced good results
directionally, though any cash held negatively impacted the Portfolio over this
period.
Stock selection at Avatar combines both quantitative and qualitative analyses.
They seek out companies that are relatively undervalued, but with earnings that
are accelerating and surpassing "consensus forecasts". In constructing the
Portfolio, current industry and business trends are evaluated to identify those
companies that will continue to sustain strong trends and will most likely
surpass expectations. The Portfolio is highly diversified with companies that
meet minimum trading volume requirements to facilitate asset allocation moves.
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Equity-only results were good for the fiscal year, up 27.6%. Though the market's
direction was clearly up for the period, sharp sector swings were the order of
the day. Exposure to the technology sector peaked last summer as many names
became expensive. As the pricing environment deteriorated for semiconductor
chips, they reduced their exposure to the sector even further. They continued
holding on to companies involved in networking, telecommunications and high-end
corporate software as these industries continued to exhibit good growth. The
energy sector was one they liked and which contributed favorably to performance
for the year. Supply-demand fundamentals were favorable for the group and
overweighted the oil service companies and the gas companies. Earnings
acceleration prevailed throughout the year and "consensus" forecasts are still
on the rise. Drug stocks were overweighed earlier in the period as their
valuations were attractive and the improving product and pricing trends appeared
on the horizon. As these trends became well accepted the stocks became
overvalued, and they took decent profits in the drug stocks, thus reducing
exposure to the consumer staples sector. On the flip side, after a dismal
Christmas, consumer cyclical stocks became relatively cheap and we selectively
purchased retailers. This group jumped ahead in the Spring as consumers decided
to go on an unexpected mini shopping spree. Overall stock selection had a
positive impact on the Portfolio's performance.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
BALANCED PORTFOLIO
WESTERN ASSET MANAGEMENT COMPANY (MANAGES 30% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1995, the total return, net of all fees
and expenses, of the Balanced Portfolio was 19.20%, compared to 15.55% for a mix
of 50% Lehman Brothers Aggregate Bond Index ("LB Aggregate Index") and 50% S&P
500 Stock Index. The gross return for the segment of the Portfolio, managed by
WAMCO was 5.68%, compared to the LB Aggregate Index , which had a total return
of 5.01% for the same period. The principal factors which affected performance
during the fiscal year are discussed below. WAMCO manages the fixed income
portion of the Balanced Portfolio.
The 12-month period ending June 30, 1996, was characterized by abnormally high
volatility in the fixed income markets, which in turn was driven by dramatic
changes in investors' expectations for economic growth. Interest rates fell
during the latter half of 1996, only to soar in the first half of 1996. By
pursuing a variety of strategies and avoiding excessive interest rate risk, the
manager was able to deliver market returns in a hostile environment.
Performance was negatively impacted by the fact that the Portfolio held a long
duration posture throughout the period and interest rates rose on balance, after
seesawing dramatically. However, the negative impact of rising interest rates in
1996 was offset substantially by the success of the Portfolio's yield curve
strategy. In addition, the manager's decision to shift from an underweight
mortgage sector exposure to an overweight exposure in early 1996 also
contributed to returns.
From a long-term perspective, the manager felt that interest rates were
generally attractive relative to current and expected inflation. This view was
based on a variety of indicators which suggested that monetary policy was
relatively tight and inflation pressures were unlikely to pick up significantly.
Chief among these indicators were historically slow rates of growth in the U.S.
money supply, relatively stable commodity prices, a strengthening dollar, global
competitive pressures, and reasonably wide spread between short-term interest
rates and inflation. Consistent with the manager's desire to avoid excessive
risk, the Portfolio's duration ranged from 110% to 120% of its benchmark
duration.
The Portfolio held a barbell exposure to maturities throughout the period, in
anticipation of a flattening of the yield curve. Particular emphasis was placed
on the long end of the yield curve, where spreads between 10- and 30-year bonds
were fairly wide (about 45 basis points) at the beginning of year. By hedging
the duration exposure of long maturity bonds and zero coupon issues held in the
Portfolio with 10-year Note futures, the Portfolio was able to target its yield
curve exposure to this sector of the yield curve specifically. This strategy was
rewarded by a noticeable flattening of the yield curve, particularly in the
second quarter of 1996, as short- and intermediate-term interest rates rose more
than long-term rates. This caused the 10- to 30-year spread to narrow to 15
basis points by the end of the second quarter, at which point the manager
decided to shift yield curve exposure to the intermediate sector of the yield
curve by selling long maturity and zero coupon issues and purchasing 5- and 10-
year issues.
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In view of the heightened risk of prepayments as interest rates fell in 1995,
and the relatively narrow yield spreads offered by mortgage-backed issues in
compensation for this risk, the Portfolio was underweight mortgages throughout
the second half of the year. This proved quite beneficial, since the sector's
performance generally lagged. Mortgage exposure shifted to overweight early in
1996 to take advantage of rising and historically wide spreads, and mortgages
subsequently turned in superior performance, thus contributing to returns.
Corporate exposure was overweight for most of the period, and this added to
returns as corporate spreads narrowed somewhat. Corporate exposure was
concentrated throughout the period in bonds at the lower end of the investment
quality scale. This contributed somewhat to performance, since moderate economic
growth helped quality spreads generally to narrow, thus favoring this sector of
the corporate market. Despite the good performance of the sector, the manager
gradually reduced corporate exposure over the course of the year, in recognition
of a) the fact that spreads have fallen to historically narrow levels, and b)
the manager's outlook for economic growth was less optimistic than that held by
the market.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
BALANCED PORTFOLIO
CAMBIAR INVESTORS, INC. (MANAGES 40% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1996, the total return of the Balanced
Portfolio, net of all fees and expenses, was 19.20%, compared to a total return
for the same period of 15.55% for a mix of 50% Lehman Brothers Aggregate Bond
Index and 50% S&P 500 Stock Index. The gross return for the segment of the
Portfolio, managed by Cambiar's was 27.80%, compared to the S&P 500 Stock Index
of 26.08% for the same period. The principal factors which affected performance
are discussed below. Cambiar manages only equity securities and accounts for 50%
of the Balanced Portfolio.
Cambiar's Portfolios are constructed company-by-company rather than investing by
industry/sector selection or asset allocation. Cambiar screens for attractively
valued stocks based on the following characteristics: low relative
price/earnings, price/book, price/sales, and price/cash flow ratios. The result
is a group of stocks trading at the lower half of their historic range, both
versus themselves and their peer group. Cambiar investment analysts following
specific industries evaluate the stocks, looking for internal improvements or
strategic developments which will trigger, in our opinion, above average price
appreciation. The Portfolios are not restricted by capitalization, although they
generally fall into the medium to large capitalization range. Portfolios tend to
hold 30 to 40 stocks.
Cambiar attempts to minimize risk by purchasing stocks at the lower end of their
relative valuation range. We also use a multifaceted sell discipline. Stocks
become candidates for sale if price appreciation results in overweighting or a
target price based on relative valuation has been reached. In addition, if the
positive developments we were looking for fail to develop, and we see no
potential improvement on the near horizon, the stock will be sold.
During the 1996 fiscal year, the overall market increased in the face of
opposing economic pictures and meteoric rises and falls in some individual
securities. Prior to the beginning of the fiscal year, the stock market had been
driven by twin catalysts of earnings improvement and declining interest rates.
In the latter half of 1995, economic pundits became concerned about a slowing
economy. Potential shortfalls or reductions in corporate earnings growth came to
the forefront on investor concern. Inflation appeared muted and the interest
rate catalyst appeared intact as Federal Reserve easing continued through
December 1995. During the first part of 1996, however, investment concerns
abruptly shifted. Strong employment reports and increasing commodity prices
fueled inflation concerns and interest rates as measured by the 30-year Treasury
bond reversed direction increasing from 5.95% at the beginning of January 1996
to 6.89% at June 30, 1996. Contrary to earlier prognostications, good news for
this period proved to be corporate earnings reports which generally continued to
meet or exceed expectations.
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<PAGE>
Cambiar's stock specific investment management process worked well in this
uncertain period. The best opportunities tended to be companies which had
previously announced some disappointment to the investment community. In these
cases, Cambiar sees opportunity when light is visible at the end of the tunnel
and not recognized in the share price. Two of the Portfolio positions, Vans,
Inc. and Harley-Davidson, Inc., exemplified these circumstances. Vans, a casual
shoe manufacturer in California had experienced a shortfall in sales of its
traditional product line, causing an excess inventory position and bloated cost
structure due to unused manufacturing capacity. Late in 1994, the Company
announced a restructuring of operations. In addition, the Company was producing
a new product, a "hot" new snowboarding boot, which was impacting revenue growth
positively. The stock price appreciated as the positive developments were
recognized. The Vans position achieved its valuation target and was sold during
the fiscal year. The share price increased 192.5% from June 30, 1995 through
liquidation in the Portfolio.
Harley Davidson was another example where potential earnings disappointment
created opportunity for Cambiar. The Harley name brand has become so popular
that in late 1994 and 1995, the Company was experiencing production problems in
meeting demand. In addition, the Harley stock price anticipated weak consumer
spending in the Fall of 1995, which caused a slight shortfall in earnings
generated by sale of Harley retail products (jackets, gloves, T-shirts,
insignia). As production bottlenecks were cleared and retail product sales
picked up, earnings began to improve along with the share price. The Harley-
Davidson position appreciated 73.2% from June 30, 1995 until the position was
liquidated for valuation purposes recently.
Other positions which performed nicely during the fiscal year were Pharmacia
Upjohn. Student Loan Marketing Association (Sallie Mae), Wallace Computer
Systems, General Electric and Dupont. Generally, the valuation of these
securities as the investment community recognized improvement in the fundamental
condition of the company or, in two cases, as the companies were involved in, or
targeted for, potential merger activity.
The Portfolio also suffered some disappointments, although outperformers
significantly outweighted laggards. The Portfolio has not had a large weighting
in technology stocks, but the poorest performers came from the few names held in
technology. National Semiconductor and Tandem have been disappointing holdings
even though Cambiar felt that the stocks were attractively valued relative to
similar companies and the market, when the positions were purchased. Generally,
earnings have not met expectations. For the fiscal year, Bandag and Asia Pulp
and Paper also performed poorly although in the most recent months Asia Pulp and
Paper has made a strong comeback.
Going forward into fiscal 1997. Cambiar intends to use the same, time-proven
stock selection methodology used in years past. We believe our bottoms-up stock
selection process works well in various market conditions over longer periods of
time. We anticipate no change in investment strategy or style, and focus our
efforts on continuing to provide superior results going forward.
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<PAGE>
COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE BALANCED
PORTFOLIO, S&P 500 STOCK INDEX AND THE LEHMAN BROTHERS AGGREGATE BOND INDEX
FOR THE YEARS ENDED JUNE 30,
Average Annual Total Return
1 Year 19.20%
Since Inception 10.70%
AHA BALANCE PORTFOLIO
Balanced S&P 500 LB Aggregate
Qtr Value Return Value
- --- ----- ------ -----
1988 $100,000 $100,000 $100,000
1989 $109,964 $117,967 $110,010
1990 $115,831 $137,325 $118,641
1991 $123,503 $147,445 $131,321
1992 $140,777 $167,384 $149,778
1993 $159,110 $190,174 $167,442
1994 $159,569 $192,732 $165,249
1995 $183,449 $242,974 $285,987
1996 $218,672 $306,332 $195,313
[GRAPH]
INCEPTION DATE FOR THE BALANCED PORTFOLIO WAS OCTOBER 20, 1988.
80
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